OECD Says Portuguese Economy May Get Worse before It Improves

According to the Organisation for Economic Corporation and Development, the Portuguese economy will contract much more than expected next year, and there is the risk that the country may spiral into more debt.

The OECD feels that Portugal will need to implement further budget cuts in order to meet the deficit targets required for its €78 billion bailout from the European Union and International Monitory Fund.

The OECD is predicting that the Portuguese economy will contract by 1.8% next year, double its forecast in July and more than the 1% contraction forecast by the Portuguese government. It has made this prediction as it is concerned that the effects of the current cuts could be larger than expected, and could initially create worsening economic conditions.

However the OECD does expect Portugal to return to growth late in 2013, as it is predicting that export growth will offset weak domestic demand.

Last year the Portuguese economy contracted by 1.7%, and is expected to contract by 3.1% this year. This means it will be Portugal’s worst recession since the country returned to democracy in 1974. Since Lisbon received the bailout funds last year it has raised taxes and implemented harsh spending cuts, but economists think the country could need more financial help.

This is because the tax hikes that will take effect next year could affect growth and private consumption which is being forecast to fall by as much as 3.5% in 2013, considerably more than the government for costs of 2.2%. Unemployment levels are already at record highs, and are expected to peak at 16.9% in 2013.

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