Week Ahead and Week in Review: September 1-5


The week began with tumbling yields on bonds throughout Europe following Mario Draghi’s remarks at the annual Jackson Hole conference. In Portugal, yields fell to 3.14% on 10-year bonds (today). The ECB President cited weak demand, despite diminishing interest rates, as a binding constraint on the Euro economy indicating that fiscal policy may need to be revised. He also continued to prepare ground for the use of unconventional monetary policy saying that “the risks of “doing too little” – i.e. that cyclical unemployment becomes structural – outweigh those of “doing too much” – that is, excessive upward wage and price pressures.

Details of the rectification of the 2014 budget, due to the veto of some measures by the Constitutional Tribunal, were announced. The announcement also included several new items in the budget, including Carris and STCP (together 0.7% of GDP) as well as the loan to the New Bank created by the restructuring of BES, which amounts to 2.9%GDP. While the relevant deficit value is expected to be 4% of GDP, including these one-time expenditures could bring the deficit to 7.6%. Tax revenue from the IRS and IVA is expected to rise this year, helping to fill in the gap. There was also unexpected revenue from BCP and BPI, who anticipated the repayment of their recapitalization loan (BPI has now fully repaid its loan). The Ministry of Finance reduced its forecast for 2014 GDP 0.2pp to 1%.

The EC’s Economic Sentiment Indicator fell by 1.5 points to 100.6 in August for the euro area, back to the level in December 2013, and by 1.2 point to 104.6 in the EU overall. The deterioration came from lower confidence among consumers as well as in the retail and industry sectors. Italy recorded the largest fall, 4.1 points, with the indicator falling below 100 to 97.8. In Portugal the indicator dropped by more than average to 100.5, down 1.9 points. Unlike the rest of the Euro area, in Portugal the decline is mainly due to consumer confidence (-3.9) and the construction and service sectors (-2.3 and -1.4 respectively).

According to Eurostat, unemployment in Portugal was fairly stable in July, falling to 14% (14.1% in June). Portugal recorded one of the largest drops in unemployment over the year in the Euro area, down from 16.3% in July 2013. Youth unemployment fell 0.9 points to 35.5% (after 36.4% in June).

Overall in the euro area unemployment was stable in July at 11.5%, with Germany and Austria recording the lowest rates (both at 4.9%) and Greece (27.2% in May) and Spain (24.5%) the highest unemployment.

IP July 2014

The Industrial Production Index for Portugal rose 3.5%yoy in July after 0%yoy in June.  All sectors improved their performance compared to the previous month, with the manufacturing growing 3.4%yoy (1.1%yoy in June). These first numbers for Q3 production are positive after a mild first semester.

A flash estimate of Euro area annual inflation expects inflation to be 0.3% in August, down from 0.4% in July and the weakest rate since October 2009. An increase in services (1.2% in August, 1.3% in July) offsets a fall in food, alcohol, and tobacco prices (-0.3% in both August and July) and steeper decline in energy (-2.0%, -1.0% in July). Core inflation was 0.9% (0.8% in July).

WEEK AHEAD September 1st-5th

This week is short on economic data.

  • Sept 2: (World Bank) The annual report on World Governance Indicators for 2013 is released, which compiles various indicators to survey the quality of institutions worldwide according to six dimensions: voice & accountability, political stability and lack of violence, rule of law, regulatory quality, control of corruption, and government effectiveness. Portugal’s rankings have been fairly stable in recent years, with a small dip in political stability since the beginning of the crisis.
  • Sept 3: (World Economic Forum) publishes its annual Global Competitiveness Report which analyses the drivers of productivity in 148 countries.  Last year Portugal was ranked in 51st place, down two ranks from the year before. However, there have been some improvements in some of the factors driving down its ranking, which last year were cited as an unstable macro environment, loss of trust in politicians and government efficiency, and difficulty in access to financing.
  • Sept 4: (ECB) The Governing Council is unlikely to change interest rates at its September meeting. However, faced with dangerously low inflation numbers and following Draghi’s speech at Jackson Hole, it may have more unconventional monetary policy to announce.
  • Sept 5: (Bureau of Labour Statistics) US employment numbers for August come out. The Federal Reserve has been watching the US labour market closely to determine the timing for an eventual increase in interest rates.