LISBON Portugal's economic slump deepened in the third quarter as a drop in exports to the rest of Europe added to weak domestic demand which is struggling under the weight of austerity imposed by a bailout.
The accelerating slump will make it yet harder for Portugal to meet fiscal goals under the bailout and will add to the government's challenge in keeping the adjustment program on track as it prepares the biggest tax hikes in living memory next year.
Gross domestic product contracted 3.5 percent in the third quarter compared to a year earlier, according to the second reading of GDP data released on Friday. It was revised down from an earlier estimate of a 3.4 percent slump.
"For the original budget plan to have been successful, it would have been necessary for the economy's drop to have stabilized," said Filipe Garcia, head of Informacao de Mercados Financeiros, a consultancy. "The numbers today confirm what everybody has said; that stabilization is not taking place."
Portugal's lenders relaxed the country's budget goals in the summer, but many economists still think they will be hard to meet considering the slump. The country now needs to post a budget deficit of 5 percent of GDP this year and 4.5 percent in 2013.
INE said domestic demand slumped 7.1 percent in the third quarter from a year earlier, a slight improvement on the 8.3 percent decline in the second quarter.
But export growth, which has been the sole bright spot for the economy, fell to 1.7 percent from 3.7 percent in the second quarter.
Trade data released separately on Friday showed Portuguese exports to Europe, its biggest market, fell 2.5 percent in the third quarter. With Europe's recession set to continue next year that could represent a worrying sign for Portugal.
Exports have faced an additional headwind in recent months from a dockers' strike.
Still, the country's bond yields have fallen sharply in recent months, benefitting from the belief that the country is meeting its bailout terms.
"We have managed to meet our objectives which has led financial markets to believe in our debt more," Prime Minister Pedro Passos Coelho told parliament on Friday, ruling out any comparisons with Greece.
Ten-year bond yields are currently around 7.5 percent, the lowest levels since the beginning of 2011, before the country sought a bailout.
The government expects the economy to contract 3 percent this year as Portugal struggles through the deepest recession since the 1970s. Next year it expects a slump of 1 percent, a forecast widely seen by economists as over optimistic, considering that most Portuguese will face large tax hikes next year.
INE said GDP in the third quarter shrank 0.9 percent from the previous quarter, revised down from its first estimate of 0.8 percent.
The centre-right government has introduced sweeping austerity measures, including cutting civil servant wages and hiking taxes, which has weighed on domestic consumption.
(Additional reporting by Daniel Alvarenga)