State in the Nation. An indebted, inflated economy, but good for a ride

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Portugal is now an indebted, highly inflated economy with faltering wages, weak investment and soaring bank repayments. But it’s a good place to hang out, thanks to tourism, which continues to break records and provide jobs.

In the last ten years, the Portuguese economy has emerged from a difficult situation (one more in its recent history), has come out of a heavy economic and financial adjustment program (that of the troika and the PSD-CDS government) imposed on residents following the bankruptcy of 2011, the PS government was in power since 2005.

The troika’s austerity, as it was called, devalued incomes (salaries and pensions were cut), impoverished the population who, the government of the time said, “lived beyond their means”, produced a lot of unemployment, especially young people, raised taxes “enormously”, caused business bankruptcies and emigration to skyrocket, stopped the birth rate, weakened public services (reflecting deep cuts in budget spending).

But at the same time, the wave of sanitation has resulted in a much cheaper and more desirable country for foreign capital and investment, looking for lower overheads, lower wages, tax breaks and good weather and friendly people.

Public and private debt was also reduced, but it was so high that it is still a concern today.

Banks, which were part of the bankruptcy problem, have also got their act together, but rating agencies continue to signal that they are more fragile than some of their European peers – they and the country could suffer if bad loans return.

It was at that time, at the end of austerity and with the country in an environment of sales, in 2013-2014, that tourism exploded in earnest, that several funds and real estate investors began to take over city centers (Lisbon and Porto are examples of this), that the housing crisis began to tighten. A crisis against which the government has announced measures, but which seems to have no end in sight.

Between 2015 and 2019, Portugal tried to get its act together. It was at this time that the discourse in favor of investments in innovation, knowledge, environmental friendliness gained traction. Portugal thus positioned itself to maximize the flow of European funds. For a devalued and decapitalized country, this manna has been essential, despite the delays.

In 2020, the world suffered an unprecedented interruption: the covid-19 pandemic that froze activities and the transit of people. The Portugal of explosive tourism, the new guarantor of job creation and historically low unemployment, had to wait, again.

It wasn’t until this year that the pandemic was officially declared over, but at the beginning of 2022, the world (and in our case, Europe) was still making the most of the period of near-zero, in some cases negative, interest rates until Russia’s war with Ukraine happened.

The long period of zero interest rates (since 2016), which many warned could not last forever, would end in the middle of last year with the start of a very aggressive and rapid rise in interest rates by central banks. The reason: the return of high inflation (it even exceeded 10% in the Eurozone).

Despite the fact that in the first few months inflation was mostly imported, the European Central Bank (ECB) still has no intention of stopping the tightening of interest rates. It says we are in a second phase of the inflation crisis. High inflation has taken root in the economic fabric, inflated the profits of many companies beyond what could be explained by fundamentals alone and the reasonableness of the forecasts made at the time, and started to pull up wages, with workers trying not to lose purchasing power. This broader, more widespread movement is intolerable for the ECB, and difficult to control.

The poorest and most vulnerable workers have been supported by governments, but even this may be undermined by the “right accounts” imperative. In 2024, the Stability Pact will be back in full force. While Portugal is managing to deliver public deficits close to 0% of Gross Domestic Product (GDP), debt will remain well above the prohibitive 100%, when the Pact’s mother rule says it should be a maximum of 60%.

Welcome to 2023

And this is where we are today, this is the state of the economy that is up for debate in the State of the Nation. An economy (state and companies) that is falling into debt, with families still trying to recover much of what they lost in the time of the troika. Problem: everyone ended up being caught in the curve by the soaring interest rates.

Today, it is an economy that, at first, still managed to reverse inflation in its favor, growing much more than expected, supported by the invoicing of companies with consumption (the case of food and energy is paradigmatic), in tourism, but much less in the desirable investment in new things of knowledge, technology and colored in green, those that, politicians say, can guarantee new jobs in the future. European funds, the anchors of this new idea of progress, although they have begun to flow, were missing in 2022. There is a long backlog that remains to be made up, which has even led to tension between the government and the President of the Republic.

It is July 2023 and the second phase of inflation, as the ECB puts it, is actually the phase of unheard-of tightening for households. The consensus among analysts and economists is clear: with more tightening, less confidence in the future and growing uncertainty about job creation in the near future, the economy will suffer. It already is.

Public accounts, driven by the ample flow of tax and contributory revenue in 2022 and early this year, will soon be constrained again too. New efforts will be required and new savings may have to happen to keep the “accounts right”, as Finance Minister Fernando Medina puts it.

For families, the “right bills” are another story. The house payment has taken a monumental leap. According to a survey carried out by Dinheiro Vivo, the average installment of new home loans will have increased by 50% or 60% in the last year until July, according to data from the National Statistics Institute (INE).

Today, that debt to the bank is around €545 a month or more. In January, it was €346.

The average monthly interest rate on new home loans (computed from Euribor) will now be above 4%, easily on its way to 5%. You have to go back to the troika’s lead years (to 2012, for example) to reach figures of this caliber (4.7%).

The liter of gasoline 95, another important good for many families, fell only 4 cents compared to January 2022, when there was still no war. In July, this final cost per liter was around 1.67 euros, according to Dinheiro Vivo accounts based on government data, from the General Directorate of Energy and Geology (DGEG).

Economy and people suffer

With all this, the economy is already suffering.

“The second half of the year may appear to be more adverse as a result of the various pressures on the environment: high inflation and rising interest rates, to which is now added a probable worsening of credit availability due to greater turbulence in the financial system”, observes the economic studies office (NECEP) of the Portuguese Catholic University, coordinated by João Borges Assunção.

“Private consumption and investment seem to continue with fragile and contingent dynamics,” the economist concludes.

The most advanced indicators (which anticipate the near future) of the desired investment seem to be fragile: cement sales have been falling consecutively since January, data from the dominant companies in the sector – Secil and Cimpor – and from the Finance Studies Office (GPEARI) show.

The INE corroborates this picture. The number of permits to build and renovate houses (housing) has also started to sink: in May, they were falling by more than 13%.

State in the Nation. An indebted, inflated economy, but good for a ride

The same INE also shows that net wages of employees seem to be faltering. In the first quarter of 2022, even before the effect of the war, the average final income that employees took home grew by more than 4%. A year later, the advance stood at a meagre 0.1%.

Tourism is saved, of course. About to break a record and surpass pre-pandemic levels, the cumulative number of guests (tourists and other customers) in hotels and similar (including local accommodation) stands at almost 11 million people. The figure exceeds the total population of Portugal and is 26% higher than the same month last year. Revenues (in euros) are keeping pace.

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