Centeno dismisses recession in Q1

The governor of the Bank of Portugal has forecast that the Portuguese economy will not go into recession in the first quarter of this year, despite the new lockdown.

He said that the economy would not suffer the same impact felt in the first quarter of 2020, a period marked by the first lockdown caused by the pandemic.
In an interview on Wednesday on RTP3, Mário Centeno added that the fourth quarter of 2020 may have been better than expected, which would help offset what could be a worse first quarter of 2021.
In the second quarter of 2020, Mário Centeno was still the minister of Finance and was president of the Eurogroup group of EU finance ministers when it decided to provide a robust and rapid budgetary response not just from Portugal but also the European Union.
At that time, Portugal’s GDP plummeted 16.3% in like-for-like terms, with the minister then expecting a fall of GDP by 6.5% for each month of lockdown.
A year on, with Mário Centeno now heading the Bank of Portugal, he is more optimistic in relation to the impact of the pandemic on Portugal’s economy.
“The economy has reacted to successive waves of the pandemic in a fairly positive way, with an increase in capacity to adapt to the difficult circumstances under which the economy has had to operate,” he said.
“At all moments when lockdowns were relaxed, the bounce-back reaction from the economy was automatic and robust” and that monetary and budgetary assistance had been “very effective.”
However, his replacement at the ministry of Finance, João Leão, says that if 2020 was better than expected, 2021 is on track to be worse, and he has already admitted that economic growth in Portugal will be reviewed downwards.
A communiqué from the finance minister’s office has confirmed what the minister himself had said at a European Parliament hearing this week: “that the new lockdown, which had not been in the government’s plans” in economic forecast terms, would have “consequences”.
He said that the 2020 deficit should be below the October forecast of 7.3% of GDP and closer to the 6.3% forecast in the Supplementary Budget of June 2020.
But Leão says that now the probable scenario for 2021, despite a more optimistic result for 2020, is that the deficit will be above the 4.3% of GDP estimated in the State Budget for 2021, and that the GDP growth of 5,4% estimated for 2021 back in October 2020 would be less, because the second wave of the pandemic would be more intense than expected.
The Bank of Portugal also believes that the moratoria did not cause any problems for the banks in 2020 and neither would they in 2021, an idea not wholly subscribed to by a former vice-president of the European Central Bank, Vítor Constâncio.
Mário Centeno says he recognises a risk to the country’s financial system and companies when Portugal “finally wakes up to the reality of loan defaults” in September, but says a nightmare scenario is “unlikely” to happen.
First, Centeno points to the increase in savings in Portugal, with bank deposits fattened by +10% with a +7% growth from families and +10% from companies, which “translates into a financial cushion to offset future possible requirements.”
The former minister of Finance interprets this increase in savings as a sign that economic agents have learnt lessons from the previous 2011-2014 crisis and have chosen to be extremely prudent.
Second, those companies that did have recourse to the moratoria have bank deposits worth 20% of the credit in moratoria and once again, from an aggregate point of view, there is a cushion to offset the end of the moratoria since this does not represent a debt write-off.
It means that in October this year, borrowers will have to go back to repaying both capital and interest owned on the loans. “We have to all prepare ourselves for this,” he warned.
Regarding the IMF and Portugal, Paolo Mauro, deputy director said that the IMF does not currently have new data, and relying on its forecasts from October last year, says that Portugal’s estimated debt will remain at 130% of GDP for the end of 2020, a deficit of 8.4% for 2020 and 2.7% for 2021 with the economy, according to the Bank of Portugal, expected to grow by around 1.2% for the first quarter.