The loss of purchasing power of Portuguese wages in the light of the pre-crisis situation (the framework that existed in 2021) will drag on for years, regardless of the scenario adopted for the current crisis (a more pessimistic, optimistic or intermediate scenario). ), indicates a study published by the government of António Costa. In a more unfavorable scenario, the loss of purchasing power (fall in average real wages) could persist for decades. In other, less severe scenarios, the biggest losses will occur from the second or third year of adjustment to this crisis, from 2023 or 2024.
Although here the reduction in purchasing power of salaries is smaller, it can extend over a long period of time, even decades; and the same is happening with gross domestic product (GDP), calculates an analysis work entitled “Macroeconomic impact of the imported inflation shock”, published by the Center of Skills for Planning, Policies and Prospective Public Administration (PlanAPP).
PlanAPP “is a central service of the direct administration of the State”, “integrated into the Presidency of the Council of Ministers and subject to the leadership of the Prime Minister or the members of the government to whom he delegates it”, says the decree law that the structure of this study and exploration office.
For example, PlanAPP is the entity responsible for drawing up the Major Options of the Plan, the multi-year document for the budget strategy and the economic policy associated with the National Budget.
Recently, the Bank of Portugal (BdP) also published forecasts on what could happen to the Portuguese economy, disposable income and household savings in the coming years (until 2025), after concluding that Portuguese household real income is on track to stagnate for at least the next three years.
This “stagnation” is like a less bad scenario in that many families have to endure the impact of the worsening cost of living as they start saving. This makes it possible to cope with higher inflation and a possible crisis or weakness in the labor market and in the country.
PlanAPP’s work points in the same direction, although in the most pessimistic scenario the destruction of wages (due to a prolonged persistence of high inflation) is more violent and problematic.
In this exercise of the entity overseen by Minister Mariana Vieira da Silva, the downward wage adjustment is an integral part of the reality assumed and expected in the near future, regardless of the severity of inflation and the crisis.
The new study “aims to assess the potential macroeconomic effects of the imported inflation shock on the Portuguese economy, taking into account different hypothetical scenarios – optimistic, intermediate and pessimistic – regarding the duration of the shock (permanent or temporary) “.
“In the permanent shock scenario (pessimistic) quite significant effects are expected, with a permanent loss in GDP and average real wages of about 2% compared to the level without shock,” the analysis said.
“With regard to the hypothetical temporary shock scenarios (interim and optimistic), the largest losses occur between two and four years after the shock and are less intense than in the case of the permanent shock. Loss of GDP and average real salary of 0.5 % and 0.3%, respectively”.
“In the most optimistic scenario, the declines in GDP and average real wages amount to 0.2% and 0.1%, respectively, compared to the no-shock scenario,” the document summarizes (see table).
The authors say that “transposing to a context outside the model (i.e. to the “real world”), a permanent shock means that, after the initial impulse of relative prices (external prices versus domestic prices) due to higher import inflation than the domestic rate, the two rates of inflation converge and become identical”.
This means that “in this context, relative prices are permanently at their post-shock levels”. The vast majority of workers lose purchasing power as the cost of imported goods dominates and, as a result, GDP falls. The economy is spending more, the external deficit is increasing.
In this more pessimistic scenario, the permanent shock translates “into a permanent 11% increase in relative prices (external prices compared to domestic prices) compared to the no-shock scenario [2021]”, says PlanAPP.
A temporary shock means that, after the initial impulse and beyond a certain point, imported inflation becomes lower than domestic, so that over time relative prices return to the initial pre-shock level (i.e., in later periods, the two inflation rates are identical). But here are two scenarios.
One of these is the so-called “most optimistic scenario”, where there is a “temporary and short-term shock, translated into an 11% increase in relative prices over two quarters, followed by successive smaller increases (7% and 4 %). ) in the next four quarters, given the no-shock scenario”. That is, the stuffiness usually disappears after a year and a half.
But there is an “in-between” scenario. Here, the government’s study assumes “a temporary but sustained shock, translated into an 11% increase in relative prices over four quarters, followed by successive smaller increases (7% and 4%) over the next eight quarters, compared to the non-shock scenario”.
In other words, the crisis is not permanent, yet the high pressures of imported inflation on the economy and the cost of living could persist for three years, the government study believes.
Source: DN
