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LISBON, Feb 15 (Reuters) - Portugal's prime minister opened the door to downgrading the government's 2013 economic forecast on Friday, a move that could undermine Lisbon's efforts to meet budget goals under its EU/IMF bailout.
The Portuguese economy shrank much more than expected in the fourth quarter of 2012, data showed on Thursday, and domestic demand is expected to be hit this year after the biggest tax rises in living memory took effect last month.
"The (fourth-quarter) results leave us with a level of foreign demand that, if extended into 2013, will not allow us to maintain the projections we have made," Prime Minister Pedro Passos Coelho told a boisterous session of parliament.
The country is now in its third year of recession, its worst downturn since the 1970s, as the economy has been hit by weak demand for exports and sweeping austerity measures imposed under a 78-billion-euro bailout from the European Union and the International Monetary Fund.
The government has projected that the economy would contract 1 percent this year but economists expect the slump to be much deeper and the Bank of Portugal forecasts a 1.9 percent contraction, mainly on the back of lower demand for Portuguese exports.
At one stage in parliament, Passos Coelho was interrupted as members of the public in the stands started singing a popular revolutionary song.
"Of all the ways to interrupt the session, this was by far the nicest," Passos Coelho said, smiling.
Lower economic output this year could make it more difficult for the government to cut its budget deficit to 4.5 percent of GDP, from 5 percent last year, which could lead to the EU and IMF demanding more spending reductions as a result.
The economy contracted by 1.8 percent in the fourth quarter on a quarterly basis, compared with a forecast 1 percent decline and much worse than a 0.9 percent decline in the previous quarter.
Passos Coelho said the larger-than-expected decline was due to lower exports. Exports had been the only bright spot of the economy in the past two years.
"We are evaluating the importance of the data we have," he said. "In the last quarter of 2012 we saw a decline in foreign demand that was far from our projections."
To successfully exit its bailout programme in mid-2014 as scheduled Lisbon still needs to convince investors it can cut its debt and make a full return to bond markets.