Portuguese economy back to 2019 levels but with a difference

Portugal’s economy is back to 2019 levels although it is performing differently with more emphasis on industry over services.

Addressing business leaders at the International Club of Portugal (ICPT) on Friday, Mário Centeno the Governor of the Bank of Portugal (pictured left with club president Manuel Ramalho) said that the economy was operating in a different way to how it had been in 2019 before the Covid-19 pandemic.
“When the post-pandemic economic recovery began, Russia’s invasion of Ukraine created a highly unpredictable economic, social and geopolitical situation. Which is why Europe’s economy is facing two shocks at the same time without precedents in recent history.
“These two shocks are superimposed which are influencing the prospects for economic growth and are introducing inflationary pressures”, he said.
“The lesson that we’ve learnt from these occurrences (the double shocks of the pandemic and the Russian invasion of Ukraine) is that the economy works as a whole and is back to the same levels of 2019 but differently”.
Speaking on the topic of inflation, Mário Centeno warned of the risks of a restrictive but aggressive monetary policy and that getting monetary policy back to normal was necessary and desirable, but had to be achieved under conditions in which the policy would not in itself be the cause of instability. In other words the medicine shouldn’t be so strong it kills the patient.
Mário Centeno said the economy now has less services and that taken as a whole, industry currently has a more significant importance on it.
The governor added that all sectors of the economy would need financing, and that in the Euro Zone there were concerns about financial fragmentation which needed to be take on board.
During the pandemic, the fiscal and momentary response through sovereign bond purchases, temporarily freezing bank loans and other credit mechanisms in Portugal and the Euro Zone had kept the threat of financial fragmentation in check. The governor said that resilient financial integration was now vital for the euro area economy and financial sector.
In the wake of the publication of the European Central Bank document Financial Integration and Structure in the Euro Area April 2022, the former minister of Finance said that private consumption is below pre-pandemic levels in Europe, which is not the case in the United States.
While the Covid-19 crisis restricted private consumption, the difference to other crises was that the risk was shared across EU countries, unlike the Great Financial Crisis and European Sovereign Debt Crisis. But nevertheless private consumption had not recovered to 2019 levels.
On salaries, the former president of the Eurogroup of Finance Ministers, said: “Despite a growing scarcity of labour in the euro area, there is still a trend for growth.
Centeno also said it was important to keep an eye on the outlook for inflation and anchor salary indicators (i.e., prevent inflation).
On the other hand, he stressed “an eventual loosening of control over inflation was “worrying central banks that are more used to working on policies, projections and remedies over the medium term and not short term”.
“The measures that the banks have to counter inflation have a very significant effect, but a weakening of expectations on inflation is, very often, seen as a lack of credibility and is therefore a considerable worry”, he added.
But during the banking conference Fórum Banca held last week Centeno admitted “not doing anything in the face of runaway inflation” was not the solution after admitting that it could remain high throughout 2022.
“Indeed, the absence of a monetary policy, or the perception that current measures are not a sufficiently strong response would inevitably increase the risk of higher costs and repercussions in terms of employment and (economic) activity”.
Mário Centeno said that although “inflation is expected to remain high this year, there are no structural reasons to discard the target of getting inflation back down to 2% in the medium term, dispelling uncertainty and bringing imbalances gradually back to normal.”
Inflation in the eurozone is expected to have reached a record average high of 7.5% in April, but not all countries using the single currency are being hit the same.
Estonia was forecast to have the highest inflation rate among the 19 countries using the euro, with prices seen 19% higher than in April 2021 because the country is heavily reliant on foreign energy imports.
The countries with the lowest inflation are forecast to be Finland (5.6%), France (5.4%), and Malta (4.9%).
In the case of Finland and France, it is attributed to a more diversified energy mix, while Malta, which relies on foreign-imported gas, has an ongoing multi-year supply deal with Azerbaijan which has helped keep prices stable.
In the case of Portugal, the inflation rate was 7.2%, the highest in 29 years, and up 1.9% on March according to the country’s national statistics office INE. This figure was influenced by inflation in energy and unprocessed food products.