Lisbon: Portugal’s economy shrank a greater than initially reported 0.6% in the third quarter, slipping deeper into recession as austerity and financing problems weighed amid the debt crisis while export growth slowed.

Brokers work in a trading room of a Portuguese bank in Lisbon. Photo: AP

The National Statistics Institute’s (INE) second reading of GDP on Friday showed a sharper quarter-on-quarter contraction than the flash estimate of minus 0.4%.

GDP contracted by 0.2% in the second quarter and 0.6 percent in the first quarter of this year, INE said.

“The reduction of economic activity is still more of a reflection of difficulties with the financing of the economy rather than the impact of austerity ... which means the recession will continue to worsen in the quarters to come when austerity measures fully kick in," said Filipe Garcia, head of Informacao de Mercados Financeiros economic consultants.

INE said that year-on-year GDP fell 1.7%, the same as in its flash estimate, after a contraction of 1% in the previous quarter.

Parliament approved last week a tough 2012 budget that suspends holiday and year-end bonuses for civil servants and hikes many taxes further.

The INE said internal demand, which has already suffered from higher taxes and pay cuts imposed this year, dropped 0.6% from the previous quarter as both investment and public consumption ebbed.

Compared with a year ago, internal demand fell a steep 4.6%, with private consumption down 3.3% and investment slumping by 13.7%.

Exports rose just 2.7% from the previous quarter, their positive impact neutralised by a 2.4% increase in imports. Export growth also decelerated to 6.5% year-on-year from 8.7% in the second quarter.

Nevertheless, another batch of INE data on Friday showed exports growing faster in the three months through October than in the third quarter, with Portugal’s trade gap falling a steep 30% from a year earlier.

The government is hoping a recovery may begin by late 2012 mainly on exports, although many economists warn Europe’s economic slowdown would make it much more difficult for Portugal to return to growth and meet its 2012 budget deficit target under the bailout. It has to slash the gap to 4.5% next year from this year’s projected 5.9%.