As Portugal’s ruling Socialist Party is headed to approve the State Budget for 2023 on Friday – amid rising social unrest and political dissatisfaction – the truth is that the document is almost certainly already ‘way off the mark’ in terms of its ‘basis’.
The latest report by the OECD (Organisation of Economic Cooperation and Development) puts inflation this year and next at a higher percentage (see box); it reduces Portugal’s growth predictions; it sees higher unemployment and a lower return in terms of exports.
In other words, the sands have shifted dramatically since PS Socialists produced the budget last month.
On cue, the European Commission has also warned of “risks”, particularly in relation to compliance with Brussels’ rules.
Not yet in any kind of position to turn on the thumb screws, Brussels’ bottom line is for “caution”, budgetary “coherence” and “prudence”. The bottom line is that financial measures in place will have to start being removed very early on in 2023 to give the country a running chance at keeping within debt limits (and few even expect this is possible).
Portugal is one of Europe’s six Member States with a debt currently running at more than 6% of GDP.
European Trade Commissioner Valdis Dombrovskis admitted earlier this week that certain countries are simply spending too much too fast – Portugal being one.
At a press conference on Tuesday, European Commissioner for the Economy Paolo Gentiloni used his powers of diplomacy: “Our evaluation is that the Portuguese budget is close to what we asked, but we are worried that the evolution of measures to face the energy crisis might push the budget away from what we recommend.”
Explained Lusa news agency: “Brussels reminded that measures for energy (meaning State support) should terminate at the end of the year. If not, Portugal runs the risk of having a growth in expenses and higher deficit than desired.”
“According to our estimates, if the impact of these measures continued through 2023, this would add over 2% to the budget,” said Gentiloni, continuing: “This is not the time to provide more budget support. That would increase inflation and create more risks for high-debt countries (…) It is, therefore, important that Member States better focus these measures on the most vulnerable households and exposed companies in order to preserve incentives to reduce energy demand, and that they are withdrawn as energy price pressures ease.”
Brussels ‘worried over price of houses’
The European Commission also raised “concerns” over rising house prices in Portugal, highlighting “signs of overvaluation” with public and private debt levels, pointing to “persistence of macroeconomic imbalances”.
“Nominal house price growth has accelerated from 8.8% to 9.4% in 2021. Nominal year-on-year house price growth accelerated to 13.2% in the second quarter of 2022. House prices were estimated to be 23% overvalued in 2021. More than two-thirds of mortgages have interest rates fixed for only up to one year,” the institution went on.
In the same document, the Commission also highlights “concerns related to the debt-to-GDP ratios of households and non-financial companies, the government and external debt”.
What this all means for average everyday people is what we all have to ‘wait to find out’.
With all the predictions, and forecasts, the truth is that no-one can know for certain: there are too many variables riding on every aspect.
“2023 is going to be a very difficult year”
Forever trying to put the most ‘understandable spin’ on impossible situations, President Marcelo Rebelo de Sousa has perhaps been the most frank: “2023 is going to be a very difficult year. Nobody knows how difficult,” he told an audience in Leiria on Tuesday. “It depends on whether the war lasts long or short; it depends on whether the effects of the war remain very high or not; it depends on whether inflation starts to come down or not; it depends on whether the problems of energy and the cost of energy are solved.”
One thing is irrefutable: “Everyone is aware that 2023 will be worse than 2022,” he said.
European Central Bank “knows exactly where inflation came from”
Financial journalist José Gomes Ferreira has a ‘different take’ on what is really going on. He has been telling SIC news that even protestations by ‘movers and shakers’ like Christine Lagarde of the European Central Bank are misleading. The crisis of ‘recession’ hanging over Europe can be ‘blamed’ on the Russian invasion of Ukraine, rising gas prices, and so on, but it has been precipitated by years of ‘quantitative easing’ (the printing of money) in excess.
“Many people in public life still do not understand” this phenomenon, he explained. Christine Lagarde says she does not know where inflation is coming from, but she is showing the “incompetence of someone at the top of a European central bank (…) She knows, or she should know (…) It comes from the exaggerated printing of money and governments failing to enact structural reforms (…) We are compromising our future, our children’s futures and those of our grandchildren and great grandchildren (…) But we think everything is alright. That is the nature of politics,” he said.
And that is why no-one can really take anything the Portuguese government, Brussels or even the OECD says with more than a pinch of salt.
Talking in Paris ahead of the OECD’s sobering World Economic Outlook published on Tuesday, chief economist Álvaro Santos Pereira (a former PSD economy minister) warned that the world’s economic woes “will only become clear in 2023”, at which point China is expected to start vying for the gas supplies which, by then, most countries will need to replenish dwindling supplies.
Europe did not have to compete with China for gas in 2022 (because of China’s economic downturns and long Covid lockdowns): “If China recovers, it will mean more demand for LNG. Where will they get it? (…) Next year is going to be a challenge,” he said.
Macroeconomic predictions
Portugal’s budget starts from the basis that inflation this year will run at 7.4%, down to 4% by next year. Growth this year was calculated at 6.5%, down to 1.3% in 2023. Unemployment has been pegged at 5.6% for both years.
The OECD, however, sees inflation running at 8.3% this year, down only to 6.6% next. It believes growth will be stuck in 2023 at 1% (a long chalk from even 1.3%) – and it sees unemployment this year running at 6.1%, rising to 6.4% next.
Brussels has not given ‘figures’; it has simply registered its ‘concerns’.
