Portugal faces two years of sharp recession: central bank

The Portuguese central bank sharply downgraded its estimates for the economy this year and next on Tuesday, in the midst of eurozone debt turmoil, saying the country was set for two years of strong recession.

The economy was heading for shrinkage of 2.0 percent in 2011, it said, downgrading a previous 2011 forecast of 1.4-percent shrinkage.

The bank said that next year the economy would shrink by 1.8 percent instead of growing by 0.3 percent as it had signalled previously, a revision of 2.1 percentage points of gross domestic product.

The new central bank forecasts are in line with forecasts by the European Commission and the International Monetary Fund.

The Bank of Portugal said that the country would feel the effects of recession during these two years because of “macroeconomic corrections” demanded by the European Union and International Monetary Fund as part of a rescue of 78.0 billion euros ($104.0 billion) rescue negotiated earlier this year.

The two years of expected recession come as Portuguese sovereign debt yields soared with markets worried that Portugal will need a second bailout to help it meet its debt commitments.

Despite the promised austerity measures, the yield on 10-year Portuguese debt has risen sharply in the last few days, although on Tuesday there was a slight respite.

Shortly after mid-day, the 10-year debt yield was 12.705 percent, down from 12.947 percent at close of trading on Monday.

Last week, Moody’s ratings agency downgraded Portuguese 10-year bonds to junk status, triggering market nervousness which has rocked share prices and the euro.

Meanwhile, Portuguese inflation fell in June to 3.4 percent on a 12-month basis, from 3.8 percent in May, the national statistics institute INE said.

Prices fell 0.2 percent from May to June the institute said.

Average annual inflation rose 3.3 percent, above the 2.7 percent eurozone average.