UPDATE 1-Bank of Portugal sees deeper recession in 2013

Tue Jan 15, 2013 9:03am EST

LISBON Jan 15 (Reuters) - The Bank of Portugal forecast a 1.9 percent drop in 2013 output on Tuesday, deeper than its last estimate as a weak global economy dampens exports and the country's bailout terms squeeze Portuguese consumers.

The bank's previous forecast was for a 1.6 percent drop in gross domestic product this year. The government forecast a 1 percent drop.

"This (the downgrade) reflects essentially the materialisation of the risk ... of less favourable global economic growth," the bank said in its winter economic bulletin. It said this had hit exports and hence the broader economy.

Exports have been Portugal's main prop in the past few years. The bank said it now sees export growth of only 2 percent in 2013, down from 5 percent in its autumn economic bulletin.

The bank said GDP should rebound to post growth of 1.3 percent next year but the 2013 and especially 2014 forecasts were at risk if meeting the targets of Portugal's bailout requires yet more spending cuts and tax hikes.

The government has launched the largest tax hikes in recent memory this year in the hope of raising sufficient revenues to ensure it meets budget goals under the bailout from the European Union and International Monetary Fund.

It is also considering 4 billion euros ($5.4 billion) of additional spending cuts in 2013-14 in the public sector.

"The great challenge that Portugal is faced with is to promote economic development in a new institutional framework," the bank said, adding that reforms need to maintain social cohesion.

Opposition to austerity has grown sharply in the past few months as more Portuguese join marches and strikes.

This will be the third year of recession as the country wallows in its worst downturn since the 1970s, with unemployment at record highs above 16 percent.