Portugal’s economic slump slowed down in the first quarter, coming in at a smaller-than-expected 0.3 per cent after 1.8 per cent in the last quarter of 2012, as the bailed out country entered what it hopes is its third and last year of recession.

Analysts surveyed by Reuters had predicted, on average, a drop of 0.6 per cent from the preceding three-month period.

While the quarter-on-quarter slump slowed down, the National Statistics Institute (INE) said the economy contracted 3.9 per cent in January-March when compared with the same period a year earlier, a slightly deeper decline than the previous quarter’s 3.8 per cent.

“Internal demand had the greatest negative contribution to the year-on-year drop, stemming from a sharp drop in investment, especially in the construction sector,” the INE said, adding that the positive contribution of external demand increased.

Paula Carvalho, chief economist at Banco BPI said the drop in investment was “the most worrying” part as that may compromise the country’s future productive capacity, while there were also risks regarding exports growth due to a weak economic environment in Europe.

But she said the figures mainly show a continuation of a pattern where “a significant fall in internal demand due to austerity is partly compensated by net external demand”, adding that the data reinforced BPI’s estimate of a 2.2 per cent contraction this year.

The government, which has imposed sweeping austerity measures under the terms of the EU/IMF bailout that have hammered domestic consumption, expects the economy to contract 2.3 per cent this year after last year’s 3.2 per cent slump.

But growth is expected to return next year. While the government expects 0.6 per cent growth next year, the Bank of Portugal sees a heftier 1.1 per cent expansion.

Reuters