Companies had to reflect price declines to contain the anger of the ECB

To bring down the inflationary fever and avoid future increases in European Central Bank (ECB) policy rates, which would then weigh on mortgage rates, the Governor of the Bank of Portugal (BdP), Mário Centeno, wrote a prescription pro: companies should start translating the reduction in the exponential price increase caused by covid-19 and the war in Ukraine into consumers, limiting the margins that could come.

“International prices of raw materials, energy and food tend to fall. This is the reversal of a temporary shock that Europe experienced in 2022, which is almost completely wiped out,” Mário Centeno revealed this Friday during the presentation of the new economic bulletin , which updates projections up to 2025 and takes stock of the inflationary crisis.

The leader of the national banking regulator foresees that “the transmission in the markets of this very large reversal of the price increase” will take place “in the coming months”. And he leaves a warning: “Only the malfunctioning of the markets can justify that this is not the case. If we fail in this turnaround, we will put additional pressure on monetary policy and we will be forced to end the process of rate hikes. to extend.” and thus lose the predictability that we may be able to achieve from the summer.”

It should be remembered that this Thursday the ECB raised benchmark rates by another 25 basis points, pushing the borrowing rate to 4%, the highest level since 2008. And warned that the trajectory will continue in July. Without committing to any projections or estimates of what will happen next, Centeno revealed only that “he expects predictability after the summer”, i.e. interest rate hikes could slow down or even be suspended, a decision that has already been made. taken by the North American Federal Reserve (Fed). “Therefore, the goods and services markets have a duty to reflect the fall in prices,” he stressed.

The pressures caused by wage increases and corporate profits were again cited by Centeno as factors overheating inflation: “If we entertain ourselves with bargaining over margins and wages that prevent the price hike from being reversed, we run the risk that the currency policy will become unpredictably causing interest rates to continue to rise.”

Key ECB interest rates, which have risen for eight consecutive months since July last year, have a direct impact on interest rates on government, corporate and individual debt and on housing loans, which are indexed at a floating rate. Centeno even predicted the downward cycle of the Euribor from the summer, but now he is more cautious in the terms and postpones this relief: “From the end of 2023, the futures markets expect a gradual and sustained reduction in the Euribor rate. is on the lives of 30% of families who have credit for permanent housing”.

Projections on inflation developments in Portugal were revised slightly downwards for this year and 2024 and remained unchanged for 2025. For example, the Harmonized Index of Consumer Prices is expected to grow by 5.2% in 2023, minus three-tenths compared to the estimates of the March. bulletin. For next year, the increase is 3.3% minus one-tenth, maintaining the 2.1% forecast for 2025.

For now, Centeno does not have enough information to conclude whether zero VAT, applied to a basket of 46 essential food items between April and October, will have had any impact on the price drop in 2023: “The measure is being evaluated with data that we are still not have to be able to make an accurate assessment”.

Medina repeats Centeno’s brilliance and wins with debt

For the first time, the Bulletin of the Banco de Portugal presents budget projections, showing that in 2024 and 2025 Finance Minister Fernando Medina should match the 0.2% budget surplus that Centeno achieved when he led the same portfolio, in 2019 estimate exceeds projections from the Executive Branch’s 2023-2027 Stability Program, which pointed to a negative balance of 0.1% for those two years. In 2023, the Portuguese economy will also improve on this indicator compared to the government’s scenario: the deficit will shrink from 0.4% to 0.1%. Last year, the State closed accounts in the red but was almost in balance: minus 0.4%.

The primary balance should be around 2.5% over the projection period to 2025, still below the 3.1% recorded before the pandemic crisis. “According to the European Commission projections, only Portugal, Cyprus and Ireland are expected to post budget balances around balance in 2024,” the same report states.

In terms of the weight of public debt in domestic product (GDP), Medina should win the race to Mário Centeno in 2024. When he was finance minister, in 2019, along with the surplus, the ruler managed to reduce the national debt to 117.7% of GDP. For the coming year, the BdP expects this indicator to fall below 100% for the first time in the past 13 years, at 97.1%. The trajectory continues downwards in 2025, with the debt falling even further to 92.5%. For this year, debt should fall to 103.4%.

The regulator is therefore more optimistic than the government, which forecasts a debt ratio of 107.5% of GDP this year, which will fall to 103% in 2024 and will only fall from the 100% line in 2025 (99.2% ).
The most positive deficit and debt scenario comes from higher economic growth driven by exports, investment and employment. Compared with the Bank of Portugal’s March forecast, GDP growth was revised upwards to 2.7% this year, 2.4% in 2024 and 2.3% in 2025. In the previous bulletin, the projections on an increase of 1.8% in 2023 and 2% in the following two years. This is “a robust performance, continuing convergence with the eurozone, with exports growing faster than foreign demand,” the central bank emphasizes. Yet there is a huge decline compared to the growth achieved last year, which was 6.7% of GDP. However, Mário Centeno prefers to point out that “in a decade [2016-2025]the Portuguese economy will grow 8.3 percentage points more than the eurozone”.

With the exception of government consumption, all components of GDP registered a new increase, namely exports, which will remain the main driver, thanks to the large contribution of tourism: foreign sales are expected to grow by 7.8% this year increase (more than 4.7%). % previously predicted) and 4.2% and 4% in subsequent years. Investment, as measured by gross fixed capital formation, also strongly influences the improvement in forecasts: this indicator should increase by 3.1% in 2023, still depending on the rise in interest rates, and accelerate to more than 5% in 2024 and 2025 “with the gradual moderation of interest rates and the investment of European funds received”, the BdP indicates.

The outlook for the labor market is also favourable, with an employment increase of 0.6% in 2023 and 2024, where the previous estimate predicted an increase of 0.1 and 0.2% respectively. The unemployment rate follows, and is expected to reach 6.8% this year, an improvement from the 7% the institution predicted in March, but still above the 6% verified in 2022. decreased slightly to 6.7%.

At this point, Centeno emphasized “the quiet revolution” taking place as the weight of wages and employment increases among the best-skilled occupations. “The sectors that have contributed most to the increase in employment are those of information, communication, real estate, consultancy and science,” said the governor of the BdP. “They represented 10% of employment in 2019 and have now contributed a third, that is, they have grown well above average, and in these areas the average salary of EUR 1806 has grown by 24% or more since 2019 EUR 347, above of the general salary average of 1310 euros,” he revealed.

‘Not an optimistic scenario’

Despite the more favorable forecasts for the Portuguese economy, Mário Centeno urges caution: “It is neither an optimistic nor a benevolent scenario, rather it is a very demanding one for anyone who wants the Portuguese economy to grow and converge with the Eurozone . And this requires financial stability and economic policies”.