Between the end of October this year and yesterday, a period marked by a pause in the very aggressive and rapid cycle of interest rate hikes by the European Central Bank (ECB), which has lasted since July 2022, the eurozone economy saw its evaporate more than 100 billion euros in predicted prosperity (GDP or real gross domestic product) for the next two years, according to calculations by Dinheiro Vivo, which compare the latest European Commission (EC) projections with updated forecasts (revisions for significant declines), unveiled yesterday by the authority chaired by Christine Lagarde.
The disappearance of more than 102 billion euros in GDP for these two years compared to what was expected in the EC forecasts (less 47 billion euros in 2024 and less 55 billion euros in 2025) is proof that, as Lagarde said, the continued monetary crisis The tightening is finally penetrating the veins of the economy (the so-called ‘monetary transmission’) and is having the desired and planned effect: reducing demand to help lower inflation. 102 billion corresponds to almost half of the wealth produced by the Portuguese economy in a year.
In 2022, Portugal still withstood the initial impact of inflation relatively well, but in 2023 and 2024 the scenario has deteriorated, due to the loss of gas in the Eurozone economy, which becomes even more serious now that Germany, the largest economy in the Euro and one of the largest in the world, is seriously suffering from this crisis and is effectively in recession.
Today there will be news in this regard. Banco de Portugal updates its forecasts for this and the next three years in the economic bulletin.
Mário Centeno’s central bank’s most recent projection for next year, dating from October, pointed to a slowdown in the economic pace to 1.5%, but recently the European Commission revised this downward to 1.3% and the OECD to 1.2%.
To a large extent, it is the material effect of rising interest rates in the real economy, which increases bank payments and puts a brake on consumption and investment.
“Our previous rate hikes continue to have a strong impact on the economy. Tighter financing conditions dampen demand, which helps to reduce inflation,” the ECB president congratulated at yesterday’s press conference in Frankfurt.
There he announced the extension of this pause in interest rate increases for another month (the last increase was in September, after he set the key refinancing rate at one of the highest values in the history of the euro. Since the creation of the ECB This tightening caused the policy rate to rise from 0% in July last year (where it remained unchanged for approximately six years) to the current 4.5%.
The result is in sight. According to the ECB, the economy will advance by only 0.6% in real terms this year (excluding inflation), which is the weakest figure since the abnormal and unique crisis of the pandemic and, before that, since the years of the sovereign crisis. crisis of the Eurozone (2012 and 2013, when there was a recession of 0.9% and 0.2% respectively).
In 2024 it can be said that the expected recovery does not exist. The ECB lowered its forecast in September from 1% to 0.8%.
Compared to the Commission’s forecast (most recent and published in November), the reduction is more pronounced: Brussels estimated 1.2%. The difference between what was expected a month ago and now results in the disappearance of 47 billion euros of expected wealth produced.
Something similar will happen in 2025. The ECB believes that growth could increase by 1.5%, below the EC’s projected growth. As a result, the aforementioned 55 billion euros in wealth ultimately evaporates.
The success of the ECB
As mentioned, key euro interest rates were suspended for the second time in a row, remaining at one of the highest levels since the single currency’s existence 25 years ago. The refinancing rate, the main reference for the costs charged to commercial banks for raising regular funds from the ECB, was 4.5%. To find a higher interest rate level (4.73%), we have to go back to the time of the implosions of the big banks and the great global financial crisis (autumn 2008).
Last Thursday, Lagarde’s leadership justified the pause in these maximum tightening levels by saying that while the ECB board decided to maintain the three key interest rates and noted that inflation “has fallen in recent months”, “inflation is also likely to temporarily will rise. again at short notice.”
And regarding possible rate cuts, Lagarde tried to cool down those most enthusiastic about the prospect. “There is no way we can let down our guard” on inflation, and furthermore, at yesterday’s meeting in Frankfurt, “we did not discuss the issue of interest rate cuts at all,” said the former head of the International Monetary Fund (IMF).
And for those who didn’t hear it at first, Lagarde added: “Between the rise in interest rates and a fall, there is a whole plateau… of pause.” So a lot of time.
ECB watchers and market analysts say this pause could last until the end of next year. It depends on the course of inflation and whether there is a new price shock or a new crisis.
Regarding the inflation scenario, Lagarde said that “experts in general [os economistas que fizeram estas novas previsões de dezembro de 2023] expect inflation [da Zona Euro] will average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026.”
Therefore, this will not be in line with the ECB’s 2% target until sometime in 2025 or later. “Compared to September projections, it is a downward revision for 2023 and especially for 2024,” he said.
Underlying inflation has also fallen again, but there is one inconvenience and that is a big one, and as always it is salaries. “Domestic price pressures remain high, mainly due to strong unit labor cost growth,” Lagarde noted.
Luís Reis Ribeiro is a journalist for Dinheiro Vivo
Source: DN
