LISBON (Reuters) - Portugal's creditors have eased its budget goals and granted it more time for deeply unpopular spending cuts under its bailout after the economy's outlook worsened further, Finance Minister Vitor Gaspar said on Friday.
The international creditors said they expect gross domestic product to slump by 2.3 percent this year, much deeper than the 1 percent drop they forecast at the time of their last review in November - starkly illustrating the impact of successive waves of austerity on Portugal's already fragile economy.
Gaspar told a news conference the country had passed the seventh bailout review by inspectors from the 'troika' - the European Commission, IMF and European Central Bank - which would qualify it for the next tranche of rescue loans worth 2 billion euros. The review lasted about a week longer than previous ones.
"Europe still lives a period of crisis," Gaspar said. "We all know how this external setting affects the Portuguese economy."
Last month, the European Commission forecast Portugal's economy would shrink by 1.9 percent this year, mainly blaming Europe's recession.
Portugal's own recession is in its third year and is the country's worst since the 1970s - brought on by a fall in consumption and investment after the government imposed painful tax hikes and spending cuts under the 78-billion-euro bailout.
With resistance to further austerity within Portugal having gathered pace in recent weeks, the lenders granted an extra year for Lisbon to make permanent spending cuts worth 2.5 percent of GDP, or roughly 4 billion euros.
These now have to be carried out incrementally until 2015 and not 2014.
The growing demands for an easing of the government's austerity program have come not just from the leftist opposition, but also increasingly from businesses.
Antonio Saraiva, head of the Portuguese Industry Confederation - the biggest employers' group - said this week it was "unthinkable and impossible" to cut state spending by 4 billion euros in two years.
LEEWAY ON BUDGET
While economic growth is still expected to return next year, that too was revised lower, to 0.6 percent from 0.8 percent, Gaspar said.
The lenders also agreed to ease this year's budget deficit goal to 5.5 percent of GDP from 4.5 percent previously. Gaspar said. They had already eased the targets once last September.
European statistics agency Eurostat had not accepted revenues from the privatization of airport authority ANA to boost last year's budget, meaning the deficit reached 6 percent of GDP in 2012.
Next year's deficit target will now be 4.0 percent of GDP compared to 2.5 percent previously - which now becomes the goal to be met in 2015. Debt will now continue rising, to peak around 124 percent of GDP in 2014.
Unemployment, which spiked to hit a record 16.9 percent at the end of last year, creating an additional fiscal headache for the government and stoking protests, is now expected to climb to 18.2 percent this year and 18.5 percent in 2014.
Previously, the European Commission expected the jobless rate to peak at 17.3 percent this year.
The Portuguese, who had shown much tolerance for austerity, have stepped up protests and strikes since the middle of last year, when the government reversed a hike in social security contributions which angered thousands.
(Reporting By Sergio Goncalves, writing by Andrei Khalip, editing by Axel Bugge, John Stonestreet)
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