OECD warns of downward spiral in Portugal

Tue Nov 27, 2012 5:00am EST

* GDP to contract 1.8 pct in 2013, 3.1 pct in 2012

* Unemployment to peak at 16.9 percent next year

* More measures "likely" necessary to meet targets

PARIS, Nov 27 (Reuters) - Portugal's economy will contract twice as much as previously expected in 2013 and the bailed-out country risks falling into a fiscal and financial downward spiral, the OECD said on Tuesday.

The Paris-based Organisation for Economic Cooperation and Development also warned in its economic outlook that further budget tightening will "likely" be needed to meet deficit targets set out under the 78-billion-euro EU/IMF bailout.

The OECD now forecasts a 1.8 percent contraction in 2013, more than the -0.9 percent it forecast in July and far more than the -1 percent predicted by the Portuguese government.

"If the demand effects of the required fiscal retrenchment turn out higher than expected, this could lead the economy into a downward spiral of worsening economic, financial and fiscal conditions," the OECD wrote.

It said Portugal will only return to growth late next year as export growth eventually offsets weak domestic demand.

The economy contracted 1.7 percent last year and is expected to fall 3.1 percent in 2012, marking debt-burdened Portugal's worst recession since returning to democracy in 1974.

Lisbon has slashed spending and raised taxes since it received the bailout last year but economists have warned of a recessive spiral which could mean the country needs more aid.

The Portuguese face the biggest tax hikes in their modern history in 2013, which the OECD said could drag on growth and private consumption, which it forecast would fall by 3.5 percent next year, more than the 2.2 percent the government estimates.

"Compliance with the headline deficit targets of 4.5 percent and 2.5 percent of GDP for 2013 and 2014, respectively, are likely to require additional consolidation measures due to the weak economy," the OECD wrote.

Record unemployment will also rise further, it said.

Besides updating its macroeconomic scenario, the OECD said deleveraging of Portugal's financial sector was inevitable but that it should work to prevent credit from contracting too fast.

"The economy will remain sensitive to a further deterioration in credit conditions and worsening conditions in other euro area economies," it said.

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