Rate hikes will continue this year and the cost of borrowing should remain at historically high levels until 2024, but Portugal’s government deficit should fall to just 0.1% of gross domestic product (GDP) by 2023. will be repeated in 2024, the Organization for Economic Co-operation and Development (OECD) will publish this Wednesday in its new outlook for the world’s most developed economies.
Portugal is growing, but loses a lot of strength in the scenario of this study. According to the OECD, real GDP could grow by 2.5% this year, but the pace will slow significantly to 1.5% in 2024.
Domestic demand, especially private consumption by resident households, will come under severe pressure from interest payments and high inflation. This GDP aggregate, which is worth two-thirds of the economy, will increase by only 0.6% in 2023 and 1% in 2024.
Total investment (public and private), which will be crucial for growth and employment in the coming years, is accelerating by 3.1% this year and rising by another 4.2% in 2024, but always supported by European funds, namely in the Plano Recovery and Resilience (PRR)says the organization that unites the three dozen most developed or richest countries in the world.
Total exports will grow by 8% this year, mainly supported by mass tourism, but the OECD sees problems with foreign demand ahead. Portuguese companies’ sales abroad should only increase by 2.6% in 2024, the worst record since the first year of the pandemic (2020, when they fell by almost 19%).
The OECD now says “real GDP growth should be 2.5% in 2023 and 1.5% in 2024”.
“The recovery and resilience plan should significantly boost public investment, although there are risks that delays in the implementation of these funds will continue.”
“The strengthening of foreign demand will support exports, especially in services”, where tourism is and will remain the pilot.
“The employment rate remains at historically high levels and wages are rising. However, consumer price inflation of 5.7% in 2023 and 3.3% in 2024 will reduce purchasing power and weigh on consumption growth.”
The PRR supports growth and new support measures in 2024, helping to mitigate the inflationary shock to household purchasing power, the Paris-based organization says.
“Although public debt has fallen below 2019 levels, it remains the third highest in the European Union”.
The OECD estimates that the government deficit will fall to 0.1% of GDP this year, a lower figure than currently estimated by Fernando Medina’s finance ministry. The organization is in line with the European Commission’s latest forecast, which was released in the middle of last month.
But he emphasizes that “a stronger fiscal framework and more efficient public spending will help to address rising spending pressures from an aging population and strong investment needs”.
“Rapid implementation of the PRR will stimulate green investments [amigo do ambiente]the accumulation of skills and the ability to provide health care, which will contribute to more sustainable growth and may also slow down the decline in inflation.
Diagnosis and reservations
“Rising energy and food prices increase costs for households and businesses, although fiscal and budgetary measures offset this to some extent.”
But with the aggressive anti-inflation policies of the European Central Bank (ECB) and Portuguese banks, “monetary and financial conditions are becoming less favourable”.
“The increase in interest rates means that home loan terms are rising rapidly, with approximately 90% of these loans being indexed at rates that are revised after a year”. For the OECD, it is clearly “a drag on household consumption and investment” in the long run.
In addition to this very strong constraint, the Organization points out that “fiscal policy support tends to diminish”.
“Fiscal policy, including the support from the PRR, will contribute to growth in 2023, but also rising inflationary pressures, but will become somewhat restrictive in 2024.”
In this context, “PRR subsidies are expected to increase from 0.3% of GDP in 2022 to 1.5% of GDP in 2023 and 1.3% of GDP in 2024, boosting public investment” and “measures to inflation shock should amount to 1.9% of GDP in 2022 and 3.7% of GDP in 2023”.
Like the ECB and the European Commission, the OECD argues that this state impulse must come to an end, taking into account, of course, the needs of the poorest.
“To maintain strong incentives for energy conservation and the ecological transition, it is important to increasingly target support to the most vulnerable households and phase out energy support measures,” argues the new outlook.
The OECD notes the “minimum wage increase of 7.8% in 2023 and another 6.6% increase expected for 2024, as well as tax incentives for companies to increase wages, which will support household income “.
But the final warning is, “expected increases in labor costs could put the brakes on low-wage employment.” It is actually the majority of jobs created in Portugal. More precarious too, including many graduates, for example.
Source: DN
