Is a Recession Inevitable?
The question is no longer whether the Portuguese economy is going to slow down. An economy reliant on tourism like ours, in the midst of a fuel crisis, is in trouble. Although no shortages in jet fuel supply are anticipated for now, in May, energy prices in Europe had already risen by 10.9%. Inflation will not stop at fuel, however, as I wrote as early as March 17th. The combination of the blockade in Hormuz with the impact of an unprecedented El Niño climate phenomenon will, with a high degree of probability, create a food crisis across much of the world.
We know what that means. Money will be lacking in the pockets of millions of people and businesses. Contrary to what economic theory predicts, people will not advance their consumption and investment decisions. Even though we are in a situation of full employment and a major supply shortage, there will be no capacity to review wages and contracts to fully offset the effects of inflation. We will therefore have a second dose of what we economists call “stagflation”—the combination of stagnation and inflation.
However, the scenario today is different from that of 2022. On one hand, the energy shock is smaller but more distributed across the globe, mitigating external demand. On the other hand, the world is not experiencing a post-pandemic boom and the corresponding adjustments in supply chains. In fact, the European Union grew by just 0.1% in the first quarter of this year, with Portugal recording zero quarter-over-quarter variation. Wage growth also recorded a sharp deceleration in the months preceding the American-Israeli offensive, both in Europe and in Portugal. Stagnation is not just a consequence of inflation—it was already here, and it just so happened that they coincided in time.
In Portugal’s case, the scenario is a bit more alarming. The first signs were worrying, as I had the opportunity to scrutinize here. Meanwhile, it has been confirmed that Portugal is losing market share in its exports after a decade of recording gains—a trend that is here to stay, according to what Brussels anticipates. The country’s mediocre economic situation contrasts with our neighbor Spain, even with such an infamous socialist government and without budgets. With several construction projects transitioning from the RRP (Recovery and Resilience Plan) to national funding, storm recovery left undone, and furthermore, the inflationary crisis, it is regrettable that Miranda Sarmento has squandered the surplus he inherited on nothing visible. If it is to comply with the rules right at the time when spending was needed, it will be time to tighten our belts.
Who is going to feel it? First and foremost, families and businesses. In fact, they are already feeling it. In the last six months, consumer confidence has dropped by an impressive 10 points. The truth is that over recent years, we have witnessed a “buying of time” for the Portuguese economy, with rampant growth in non-financial private sector debt. But this stopgap is coming to an end. Interest rates are already rising. Banks across Europe are already tightening credit conditions. And the ECB has not decided anything yet.
Everything points to it doing so at its next meeting. The Governor of the Bank of Portugal has already declared his “hawkish” stance, wanting to raise interest rates “sooner rather than later.” This is irresponsible toward a country whose credit is highly exposed. Above all, it is a contradiction given the temporary nature of the shocks, their insensitivity to interest rate changes, and the lack of credible signs that medium-term inflation expectations have “unanchored.” Therefore, a restrictive monetary policy is not only unnecessary but also ineffective. With no real gain, it is merely a punishment for all of us to face. Everything is already more expensive, and these politicians-turned-monetary-economy-wizards have decided to make mortgages, car loans, and business loans even more expensive. On the part of the PS (Socialist Party), we have already called Álvaro Santos Pereira to Parliament to provide explanations.
The management of these crises therefore brings into focus a growing risk of recession. If in 2022, when there was some pressure on the demand side, this was already the wrong response, now it is even more so. But there are always alternatives—it is far from inevitable that the economy will give in. We need to mitigate the impacts of the crisis, and not just among the poorest and most vulnerable, and we need to support industrial transformation that allows prices to be contained by recovering supply through other means, rather than through demand containment. Inflation is fought by producing more, transporting better, and depending less.
There was a time when supply-side economics was a right-wing fetish. Today, it is a rhetorical embellishment in the speeches of so many, using expensive words like “strategic autonomy” but without real decisions or resources to make them happen. There was a time when support for the cost of living was never enough. Today, support is lower, but that is just a fact for whoever is in opposition.
However, behind the Excel spreadsheets and political arguments are people and their lives. There are companies and their growth projects. Housing, mobility, food, and energy are all more expensive, all at once. It is a suffocating situation for which we bear no blame, about which we can do nothing, but for which we will have to pay the bill. And it is always the same people paying. Just as there will always be a few who get away scot-free. If we do nothing, a recession will seem inevitable, but above all, it will have been chosen. And with consequences for our social contract that none of us want to imagine.
Miguel Matos/MS
The content on the Milénio Stadium website is automatically translated using Google Translate.









