In its just released autumn forecast, Banco de Portugal justifies the rise in inflation with strong external pressure on prices
The Bank of Portugal has just revised growth forecasts for the Portuguese economy this year upwards to 6.7%, from 6.3% it had forecast in June. According to the organization, the national economy “continues to benefit from the recovery of tourism and private consumption”.
As for inflation, the institution led by Mário Centeno now estimates that it could reach 7.8%, a significant increase compared to the last forecast, which would see prices rise at 5.9%.
“In 2022 inflation will rise to 7.8% as a result of increasing external pressure on prices. Strong demand for goods and services, whose consumption was conditioned during the pandemic, is also contributing to the upward trajectory of inflation, with a deflection expected towards the end of the year,” the statement read on Thursday. was released.
In the recently released autumn forecasts, the Bank of Portugal justifies the rise in inflation with strong external pressure on prices. On the other hand, economic growth mainly benefits from the recovery of tourism and private consumption.
As for private consumption, it will grow by 5.5% in 2022, “benefiting from the lifting of restrictions related to the pandemic and the realization of deferred spending”. Real disposable income is stagnating, the organization says, “conditioned by the inflation profile, while the savings rate falls from 9.8% to 4.9%”.
Banco de Portugal also announces that the “labour market has performed remarkably”, but with “some signs of moderation throughout the year”. Employment is growing at 2.3% (down from 1.9 in 2021), while the unemployment rate falls again to 5.8%, a “historic low,” the document reads.
“There is sufficient margin” to meet the deficit target
The BdP believes there is scope to meet the government’s estimated deficit target of 1.9% of GDP for this year, reflecting good tax revenue performance, despite measures to mitigate the impact of inflation.
In the economic bulletin released this Thursday, the Bank of Portugal explains that to cut a deficit of 1.9% of gross domestic product (GDP) as included in the state budget for 2022, a three-year deterioration is expected. points percentages (pp.) in the second half of the year, excluding temporary measures.
The banking supervisor notes that, along with the costs associated with the pandemic, the measures to mitigate the effects of the price increases will have an impact on the balance in 2022, “slightly lower than in 2020 and 2021”, about 3% of GDP, and are more concentrated in the second half of the year.
In this way, it indicates that “in the favorable context for the evolution of tax revenues, even taking into account the budgetary impact of these policies, which are estimated at about 3.2% of half-year GDP in the second half of the year, there is sufficient margin to meet the objective official”.
GDP grows to 6.7%
Banco de Portugal improved its growth outlook by 0.4 pp this year. to 6.7%, suggesting a recovery from pre-pandemic levels in the first quarter, but a subsequent slowdown, which will manifest in 2023.
The institution only presents forecasts for this year, but points to the impact in 2023 of the slowdown in economic growth registered from the second quarter of this year. “The negative effects of the Russian military aggression in Ukraine were amplified throughout the year, implying a relative stabilization of activity from the second quarter. These effects will be more noticeable in 2023, anticipating a significant slowdown from 2022, with a knock-on effect of more than 3.9 pp. [pontos percentuais] to 0.5 pp.”, can be read.
For this year, however, the growth forecast for gross domestic product (GDP) has been revised upwards by 0.4 percentage point. to 6.7% compared to June, with the Portuguese economy benefiting from the recovery in tourism and private consumption.
However, it is mainly due to the effect of the stronger recovery in 2021 and in the first half of this year that the downward revision in the second half of 2022, for which a strong slowdown is already expected, is overcome.
Overall, therefore, growth in 2022 largely reflects the carry-over effect of 2021, but also a significant contribution from exports and private consumption and a weaker role from investment, growing by only 0.8%, compared to 8.7% in 2021.
It is the first time since 2016 that private consumption, which the BdP expects to grow by 5.5%, has outpaced investment.
Despite the investment rate, the institution points to supply constraints, increases in production costs, deteriorating financing conditions, low execution of Recovery and Resilience Plan (PRR) funds and high uncertainty.
The regulator also estimates a growth of 17.9% in exports and 10.8% in imports.
However, the regulator warns that uncertainty surrounding the forecast is “high”, with the most adverse economic effects from the war in Ukraine posing the greatest risk.
The deterioration in the short-term outlook for the Portuguese economy is linked to the consequences of the invasion of Ukraine – the need for energy rationing in Europe during the winter, maintaining high prices for these types of commodities and the rise in uncertainty.
The BdP also emphasizes that “the more unfavorable external and financial environment and the shock to household purchasing power imply a more unfavorable evolution of GDP in the coming quarters”.
“In this context, there is an urgent need to promote effective and efficient use of PRR resources and accelerate the pursuit of reforms within its scope that will help reverse the recent slowdown in private and public investment and support economic activity in the short and medium term. term,” he concludes.