Bailed-out Portugal's recession seen worsening 

Portugal's recession will deepen this year under the weight of austerity measures meant to reduce public debt, the bailed-out country's central bank predicted Tuesday.

Portugal is trying to free itself from a huge debt burden that forced it to ask for a €78 billion ($100 billion) financial rescue package last year to avoid bankruptcy.

But the Portuguese economy, one of the frailest among the 17 countries that use the euro as its currency, is buckling under the austerity cuts and fueling investor fears about the bloc's chances of recovery from its two-year-old sovereign debt crisis.

The central bank said in a report it expects the economy to contract 3.1 percent this year. Last October, it forecast a 2.2 percent contraction in 2012.

As in bailed-out Greece, the government faces a dilemma as it tries to cut spending while at the same time fostering the growth it needs to settle its debts.

The jobless rate has climbed to a record 13.2 percent, and trade unions have staged strikes and protests against tax hikes and pay and welfare cuts.

Finance Minister Vitor Gaspar told lawmakers Tuesday he planned no new austerity measures this year. He said any funding shortfall would be made up through the sale of state property and gambling concessions.

Portugal went into a double-dip recession last year, contracting 1.6 percent, the central bank said. The economy will be "virtually stagnant" in 2013, it said.

The debt crisis has caused Portuguese living standards to drop, with the central bank estimating that disposable income would decline 11 percent between 2011 and 2013 — the duration of the bailout agreement.

On a brighter note, the bank predicted 4.1 percent growth in exports but said the increase would not be enough to compensate for a 6.5 percent drop in domestic consumption.

Labor market reforms are "crucial" to get the economy back on track, the bank said, adding that implementation of planned measures must be speeded up.

The center-right government is having a hard time getting agreement with employers and unions, however. It wants to extend working hours by 30 minutes a day with no extra pay, slash worker compensation for layoffs, and make hiring and firing easier. It is also pushing companies and unions to reach an agreement quickly amid fears the measures could aggravate public discontent.

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