LISBON The Portuguese government's focus on raising consumption will fail to stop the economic slowdown and could complicate deficit and debt reduction as investment keeps falling, the chief of the country's main business lobby warned.
Antonio Saraiva, president of the Portuguese Business Confederation (CIP), told Reuters his group was worried by this week's final second-quarter GDP data that showed growth well below levels promised in the budget. He did not share the government's optimism that a pick-up is under way.
"We don't have investment or economic growth worthy of the term," said Saraiva, citing the quarter-on-quarter expansion of 0.3 percent. "We are worried because the main engines, investment and exports, are cooling off."
Some analysts say weak growth could undermine Portugal's last investment-grade credit rating that keeps it eligible for bond purchases by the European Central Bank, potentially setting off a new debt crisis after a 2011-14 EU/IMF bailout.
With this year's budgeted growth target of 1.8 percent now practically unachievable and most economists seeing a slowdown from last year's 1.5 percent, Saraiva said the government must focus on promoting investment and exports in next year's budget, to be presented next month, by implementing much-needed reforms.
The minority Socialist government, backed in parliament by the hard left, took over in November and has reversed many austerity measures of the previous administration to give more income to households in the hope of boosting consumption. Portugal had imposed painful austerity under its bailout terms.
However, domestic demand growth slowed to just 0.2 percent from the previous quarter's 0.6 percent and 1.3 percent a year ago, while investment fell and exports grew less than in 2015.
"The domestic market is small and supply volume saturated - it's not enough to solve the growth problem. When this government makes its main bet on private consumption and higher income, this does not give us tranquillity," Saraiva said.
Investor doubts about whether the government will survive if the leftist parties reject budget cuts likely to be required next year have also affected investment decisions, he said.
The government touts a fall in second-quarter unemployment to five-year lows of 10.8 percent as a sign that growth is picking up. But Saraiva said that "all other indicators are worrisome" and the good jobless data are linked to the country's tourism boom, which means many summertime jobs are temporary.
Prime Minister Antonio Costa vowed this week that even with the current growth this year's deficit target of 2.5 percent of GDP will be achieved. But Saraiva said the longer-term sustainability of deficit and debt was at stake.
He criticised the administration for quietly shelving a gradual corporate tax reduction announced by its predecessor and urged it to provide more tax clarity and stability to investors.
While lauding the government for pushing for less red tape for businesses, he said the main concern for companies was the slowness of the justice system that often means years before firms can receive what they are owed via courts.
"The justice reform for the economy has failed," he said, referring to the previous government's attempts to unclog the courts after much pressure from the European Commission and the International Monetary Fund.
"The country needs reforms to promote investment - justice reform, less red tape, tax stability, strategic bets on certain sectors such as deep-water ports, naval maintenance, digital."
(Reporting by Andrei Khalip; editing by Mark Heinrich)