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The impact of higher interest rates has reached the Portuguese economy, which is resisting more than expected – Observer

The impact of higher interest rates has reached the Portuguese economy, which is resisting more than expected – Observer

The first quarter of the year was an election campaign. The government was in the current administration. The March 10 election brought in a chief executive of a different political color. At this moment, along with the expectation of what the European Central Bank (ECB) might do, it has halted investments in Portugal in the first quarter of the year, according to data on the development of GDP (gross domestic product) for the first three months of the year. the year. The Portuguese economy grew, on an annual basis, by 1.5% in that period, more than the initial estimate forecast by the National Institute of Statistics in April (which indicated 1.4%), after it rose as a result by 0.8% (more than 0.7%). advance).

João Borges da Assunção, from Católica, points out that the Portuguese economy “offers a level of production equivalent to 106.3% of the fourth quarter of 2019, the last normal period before the pandemic,” also mentioning that “the year-on-year variation was 1.5% after 2.1%.” This decline is explained by the demand base in the first quarter of 2023, recalling the high chain growth (1.5%) observed after that.”

According to the National Institute of Statistics, foreign demand supported GDP growth, with exports rising more than imports, which were also hampered by suppressed investment. But also due to the decline in household consumption of durable goods.

High interest rates Start gradually And convey its negative effects to performance “Unavailable to families and corporate treasuries, which penalizes private consumption and investment,” comments Paolo Montero Rosa, chief economist at Carigosa Bank, in written responses to El Observador, adding that “Households are increasingly considering purchasing durable goodsThis reflects the growing uncertainty in the face of rising interest rates and the economic slowdown.

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[Já saiu o terceiro episódio de “Matar o Papa”, o novo podcast Plus do Observador que recua a 1982 para contar a história da tentativa de assassinato de João Paulo II em Fátima por um padre conservador espanhol. Ouça aqui o primeiro episódio e aqui o segundo episódio.]

Banco BPI, in a briefing note on the INE data, also highlights a 3% decline in gross fixed capital formation (GFCF) (pure and hard investment), with the year-on-year variation recording an increase of 0.3% (compared to 4% growth in The fourth quarter).

INE is seeing slight upward growth. GDP rose by 1.5% on an annual basis in the first quarter and 0.8% on a quarterly basis

“The behavior of the Global Capital Fund will result from two aspects: a postponement of investment decisions linked to the possibility that funding costs will soon begin to reflect the prospects of a European Central Bank cut in interest rates; and an environment of greater uncertainty linked to the holding of early elections in March 2024,” the BPI notes. Paulo Rosa also points to the decline in investment in transport equipment and other machinery in particular, as justified “by prudent corporate management ahead of the March 10 elections.”

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João Borges de Assunção, coordinator of NECEP (Centre for Catholic Studies), does not attribute a dominant factor to the elections. “The economic sentiment data has seen a slight decline since the election was announced, but to say that was 'because' of the election seems bold to me,” he told the Observer.

Investment grew, on an annual basis, by 1.5%, while in the same period last year, and compared to the previous year, it decreased by 4.4%. In the previous quarter, it rose by 3.6%. According to data from the National Institute of Statistics, gross fixed capital formation also slowed, going from a growth rate of 4.0% in the fourth quarter to 0.3%, while the contribution of the change in stocks to the annual increase in GDP was +0.2 percentage points in the first quarter. , while it decreased by 0.1 points in the previous quarter. “With regard to the contribution of inventories, their behavior in the first quarter may be an indicator of increased production in the second quarter, which, if verified, is positive for the behavior of GDP in the second quarter of 2024.”

The Bank of Portugal indicates a quarter-on-quarter GDP growth of 0.6% in the second quarter, an annual increase compared to 2023 of 2%.

The economy will grow more than expected, the Bank of Portugal predicts. GDP is expected to rise by 2% this year

At this moment, the Bank of Portugal is the most optimistic in its annual outlook. The International Monetary Fund and European Commission expect GDP to increase by 1.7% in 2024, with the OECD and Fiscal Council forecasting 1.6%. The most pessimistic is the government, which indicated in its stability program an annual growth of 1.5%, based on fixed policies, that is, without considering any impact of the new measures taken by the executive authority.

The government says it has little scope for budgetary stimulus to the economy. The forecast provides 750 million cushions to maintain the surplus

With companies halting investment and households postponing purchases while waiting for the European Central Bank, inflation indicators have cast doubt on the equation once again. If it seems certain that the ECB will cut interest rates at its meeting on June 6, doubts remain about the future path. João Borges de Assunço added that the eurozone inflation rate rose again in May to 2.6%, higher than expected, “but still within the process of deceleration of inflation,” but he left a note: “Nevertheless, I think inflation The European Central Bank may consider postponing interest rate cuts next week. To the point that “core inflation remains very high and shows uncontroversial signs that inflation in the region is under control.”

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Core inflation (excluding energy and food) rose to 2.9% year-on-year.

“In terms of monetary policy implications, published data show that inflation is close to 2%, but still above target and with higher inflation in more rigid prices,” the BPI notes, adding that it is therefore “making progress in lowering inflation.” What is reflected in these figures will allow the ECB to make its first interest rate cut (-25 basis points) on June 6, although a dovish stance will be favored in subsequent ECB cuts for the rest of the year.

This was a signal recently made by the European Central Bank's chief economist, Philip Lane, who, after the expected drop in interest rates in June, should consider restraint in subsequent cuts. The Irish economist believes that interest rates should remain in the “restricted zone” at least until the end of the year.

The European Central Bank's chief economist says interest rates should remain in “restricted” territory at least until the end of the year

In Portugal, inflation also rose. Consumer prices in May rose 3.1%. Which prompted the inflation index to make a “slight upward revision of the average inflation rate in 2024, to 2.5%.” For this entity, “the May IPC figure highlights what we have already warned about: The process of deflation will be very long We are not exempt from such surprises.” Although part of the behavior was a result of the underlying effect. In May 2023, a monthly reduction was recorded through exemption from value-added tax on the basket of food products. However, the BPI warns that “inflation in overall services as a whole currently represents the main support for the impact of the inflation figure” and although this data is not yet available for May, “in April, very services intensive (hospitality and services) restaurants, telecommunications, health ) contributed about 40% to the annual variation in prices and in the first four months of 2024, total services explain on average 83% of the global CPI and showed a significant persistence of over 4%.

Inflation accelerated again in May to 3.1%, as it did in the eurozone

The ECB's tone will also contribute to strengthening private consumption in the coming quarters, which was still strong in the first three months of the year, which brought salary increases for many groups. NECEP considers, in the data of the National Institute of Statistics, that “it appears that only private consumption is continuing the clear recovery path, Demonstrating unexpected flexibility “In a context that is still characterized by inflation.”

Household spending grew 0.7% year-on-year in the first quarter, after rising 1.6% in the previous quarter, with a 3.5% decline in durable goods purchases and a slowdown in non-durable goods and services (from 1.2% to 1.1%). % in the first quarter). As a whole, household expenditures rose 1% (compared to 0.7% in the previous quarter), grew 1.4% in nondurable goods and services (0.6% in the previous quarter), and decreased by 2% in durable goods (1.4% in the fourth quarter). . This consideration when purchasing durable goods was noted by the economist at Banco Carregosa.

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With the possible reduction in interest rates, disposable income could have an impact on the next development of private consumption.

GDP growth of 1.5% is directly linked to the balance of external demand. This represents a third of the annual growth recorded in the first quarter, “but it is the slowdown in imports greater than in exports that contributes to the improvement in external accounts, indicating a slowdown in household spending and corporate purchases of foreign currency.” Goods and services,” Paolo Rosa points out.

In fact, this low growth in imports is associated with suppressed investment and lower household consumption of goods (especially durable goods).

The contribution of net external demand to the series variance of GDP “returned positive”. But the impact of prices on imports also had an impact, especially due to lower prices associated with energy products, which Portugal imports in large quantities.

But here too the trend may be the opposite, as a greater increase in consumption and investment could lead to more imports.

Overall during the quarter, the data points to a positive trend, prompting BPI to revise its 2024 forecast upwards from 1.6% to 1.7%. “This trend should be strengthened throughout the year, as we continue to expect that 2024 will be characterized by a strengthening of the inflation deceleration process, with the beginning of a reversal of the interest rate cycle by the European Central Bank, (contributing to the easing of financing conditions),” a process that “will allow… Families can improve their disposable income, which they can allocate to consumption and savings. On the corporate side, “reducing financing costs, coupled with the implementation of European funds, will support investment.” Thus, growth may be “particularly driven by domestic demand, as private consumption continues to be supported by a flexible labor market and by investment that tends to be stimulated by the implementation of European funds, which in turn expects stronger growth in imports than in domestic demand.” Until 2023; Exports may behave slightly weaker, reflecting the fragility of activity in major trading partners.

Investment is disappointing at the start of the year due to political uncertainty that is “unresolved” with the election. Consumption remains 'elastic'