More government deficit, debt falling, but less than predicted by Treasury, more inflation, more unemployment, much less growth in 2023.
So says the International Monetary Fund (IMF) in its new forecasts for Portugal, released yesterday as part of its World Economic Outlook. All are more unfavorable than Minister Fernando Medina expects in his new macroeconomic scenario, in which the proposed state budget (OE2023) is delivered the day before.
For the institution led by Kristalina Georgieva, the Portuguese economy should grow by just 0.7% next year (the OE says 1.3%).
If growth is weaker in 2023, as the IMF says, it will have a direct and rapid impact on government accounts (the deficit the government wants to reduce to just 0.9% of GDP in 2023), will put downward pressure on tax and premium income and increasing government spending.
For the Washington institution, under these circumstances, the Portuguese government deficit should fall by only half a percentage point to 1.4% of gross domestic product (GDP).
This is because, the IMF says, the global environment is rapidly deteriorating due to the war, rampant inflation, the faltering world trade, a massive crisis in China’s real estate market. “The worst is yet to come and for many people the year 2023 will look like a recession,” said Pierre-Olivier Gourinchas, the Fund’s chief economist.
In 2023, Germany will enter a recession (annual real contraction of 0.3% compared to 2022), Italy will also (0.2% less), Spain (Portugal’s largest economic partner) will only grow by 1.2%, France will not come beyond 0.7%. The world’s largest economy, the United States, is growing at a modest 1%.
Despite the “great uncertainty” and the “degradation of the external context”, Medina’s words on Monday, in the OE2023, the government deficit looks set to fall as much as expected from next year onwards. The situation is worse, but the pace of fiscal consolidation continues. The economy is freezing, but unemployment remains at 5.6% of the active population.
Medina promised that if it is necessary to adjust fiscal consolidation to support households and businesses with “fundamental” spending, he will not hesitate to do so. You ask for a corrective budget.
According to the Fund’s new accounts, debt is declining, but slightly slower than estimated by the Treasury Department. The ratio to GDP is expected to fall from 114.7% to 111.2%. At Terreiro do Paço, in Lisbon, the figures are: 115% in 2022 and 110.8% at the end of 2023.
The IMF’s public accounts figures are presented today by Vítor Gaspar, the former Portuguese finance minister, who is currently director of the Fund’s budget department.
Whatever the case, for the IMF, the year 2023 should be weaker and more vulnerable than the government says. In this sense, the macroeconomic scenario calculated by the IMF dismantles or modifies the main features on which the budget proposal is based.
As mentioned, the growth of the Portuguese economy should remain at 0.7% in 2023, inflation is much higher (about 4.7% and not 4% as estimated in the OE) and the unemployment rate will rise, it could rise to 6.5% of the active population (the government then assumes a stabilization of unemployment at only 5.6%).
One of the largest background differences therefore quickly appears in the forecast of growth and inflation.
Starting with the starting point (this year), which is also weaker. While the Treasury Secretary estimates economic growth of 6.5% for 2022, the Washington-based entity sees only 6.2%.
And as mentioned, in 2023 the economy should grow just 0.7%, almost half of what the Treasury Department in the OE assumes (1.3%).
Contrary to the Portuguese government, the IMF now predicts an increase in unemployment from 6.1% to 6.5%, so it must be assumed that this transmission will entail more additional expenditure for, for example, social support and subsidies.
The government doesn’t work in this scenario: the new OE2023 says unemployment will be 5.6% this year and the next, unscathed by the “degradation” of the external environment.
Much higher inflation
As mentioned, the IMF’s inflation forecast is significantly higher (4.7%) compared to the 4% on which the entire OE2023 is based.
Minister Medina even said that on inflation he does not even work with a margin of error: “in inflation we do not work intermittently”, the minister stated in response to a question from Dinheiro Vivo, to the EO press.
For Finance, the forecast for price increases in 2023 is 4%. Point.
Part of the difference in expected inflation (government versus IMF) may be in the hypothesis of the evolution of the price of a barrel of oil. The Ministry of Finance is betting on a drop of more than 20% in the cost of a barrel.
The IMF points to a reduction, yes, but only 13%. It’s an essential difference.
Marcelo Rebelo de Sousa came out yesterday to defend the government’s macro scenario. “In the case of the product [PIB]I think the IMF probably doesn’t take into account this balance that runs from the year 2022 to 2023, the way the Recovery and Resilience Plan (PRR) is managed” because “a significant portion of the PRR slipped from 2022 to 2023. All this added together makes the difference in the product,” said the chairman.
very pessimistic background
The IMF believes little in its comprehensive diagnosis of the world and nearly two hundred economies. “Global economic activity is experiencing a broad and stronger-than-expected slowdown, with inflation exceeding what has been observed in decades. 19 pandemic weighs heavily on these prospects,” said the former Portuguese creditor.
For example, “world growth is expected to slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023. Aside from the global financial crisis and the acute phase of the covid-19 pandemic, this is the weakest growth profile since 2001”.
In addition, world inflation is expected to rise “from 4.7% in 2021 to 8.8% in 2022”, before falling back to 6.5% in 2023 and 4.1% in 2024.
But the IMF defends that monetary policy must “maintain its course to restore price stability”, i.e. continue to raise interest rates until inflation returns to a level close to 2% “cost of living”.
Luís Reis Ribeiro is a journalist for Dinheiro Vivo
Source: DN
