Portugal's economy contracted in the second quarter, deepening the country's recession as unemployment hit a new high, weighed down by sweeping austerity imposed under a 78 billion euro (HK$747.2 billion) bailout program.

There were signs that the slump was spreading to previously resilient parts of the economy, analysts said, suggesting things would get even worse before they improved, Reuters reports.

Gross domestic product shrank 1.2 percent quarter on quarter, statistics institute INE said, after dipping 0.1 percent between January and March as domestic demand weakened. It said unemployment rose to 15 percent in April-June from 14.9 percent in the previous three months. The government expects the jobless rate to peak at 16 percent next year.

"The trajectory of the Portuguese economy remains negative, reflecting the conditions from the previous quarter, with financing difficulties, lower confidence and the deceleration of economic activity in the euro zone, which is hitting companies and families," said Filipe Garcia, head of Informacao de Mercados Financeiros consultancy.

Portugal, which sought an international bailout in May last year, has seen its economy contract for seven consecutive quarters and is struggling through its deepest recession since the 1970s.

The center-right government expects the economy to shrink 3 percent this year as a whole, having has introduced sweeping austerity measures, including cutting civil servant wages and hiking taxes.

The INE said that internal demand fell more in the second quarter than in the first, while export growth, which had helped to offset most of the impact of austerity in the first quarter, has slowed.

Growing economic challenges in neighboring Spain, Portugal's biggest export market, have added to Lisbon's woes.

"We have passed the phase when the difficulties only hit the weakest [Portuguese] companies to a situation when efficient companies are facing liquidity difficulties," Garcia said.

Unemployment has risen faster than expected this year, prompting concern among the country's European Union and IMF creditors. Youth unemployment was at 35.5 percent in the second quarter.

Many economists say that Portugal - the third euro zone country to seek a bailout after Greece and Ireland - will be unable to meet fiscal targets agreed under the EU/IMF rescue due to the recession and will need more international funds.

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