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Contraciclo - O blogue da CFP

Back to the future: A database of macroeconomic and fiscal projections for the Portuguese economy in the 21st century

By: Erica Marujo, João Leal e Tiago Martins

As of today, an archive will be made publicly available that brings together, in an exhaustive and organized way, the macroeconomic and budgetary projections released by the main national and international reference institutions and bodies since the year 2000. This initiative to compile and create a centralised database is innovative in that it is a digital tool that facilitates fast, free and systematic access, in a single location, to a set of information that is currently dispersed and sometimes in a format that is difficult to access. This is a service that no other public institution in Portugal has ever provided until now. 

 

The creation, dissemination and future updating of this archive is part of the mission of the Portuguese Public Finance Council (CFP). In accordance with the combined terms of the directly applicable Community legislation and the Budgetary Framework Law, it is up to the CFP to pronounce on the proposed objectives regarding the macroeconomic and budgetary scenarios, the long-term sustainability of public finances and compliance with fiscal rules. Its Statutes point out that the CFP "contributes to the quality of democracy and economic policy decisions and to the strengthening of the financial credibility of the State." The CFP also publishes, in a timely manner, opinions on the macroeconomic scenarios underlying the State Budget Proposals (DSB) and the Stability Programmes (SP), and more recently, the National Medium-Term Budgetary-Structural Plan (POEN-MP). The creation of the archive for projections for the Portuguese economy should facilitate all these processes, and at the same time will contribute to ensuring historical memory.

 

To date, also within the framework of the objectives underlying its mission, the CFP regularly publishes a comparative table of the latest projections for the Portuguese economy. Called Consensus, it brings together the latest projections for the Portuguese economy released by different institutions. The comparative table includes the following entities: Bank of Portugal (BdP), European Commission (EC), CFP, International Monetary Fund (IMF), Ministry of Finance (MF)[1] and Organisation for Economic Co-operation and Development (OECD). However, as it is restricted to the most recent projection scenarios, this is a static photograph, not allowing us to gauge the evolution of the projections of the same institution, or of its whole, over time.

 

The information currently dispersed in 352 individual publications was aggregated. Of these, 99 belong to the BdP; 59 to the MoF; 55 to the EC; 68 to the IMF; 51 to the OECD; and 21 to the CFP. It should be noted that the CFP has only released its own macroeconomic and fiscal projections since March 2015.

 

This file will be accessible through an interactive interface in digital format. It will also be an important source of information for the academic community, especially in the area of research and evaluation of the quality and accuracy of projections. The data will be disseminated in different formats (CSV and Excel) and the information will be graphically represented through different configurations, having been built an interactive interface in Excel in which the user can use various filters. 

 

The graphical representation also includes the construction of a composite indicator that allows the weighted evolution of the projections to be visualized, for different years, and for each variable, in real time. A first approach to this methodology has already been disclosed in Box 2 of the "Economic and Fiscal Outlook 2024-2028 (Update)". Another relevant contribution is also included for those who follow the evolution of the expectations of economic agents: two composite indicators, which consider, over time, the evolution of the projections for t+1 (following year) and t+2 (two years), and can be extracted from them information on the expected evolution, with a more cyclical or more tendential tendency, for the various different variables.

 

This repository will present, in an exhaustive way, the history of the entire set of annual projections prepared by these six institutions for a key set of twelve macroeconomic variables. These variables correspond to real GDP and its components of expenditure (private consumption, public consumption, investment (GFCF), exports of goods and services and imports of goods and services), the GDP deflator, inflation rate[2] and nominal GDP, and the evolution of the labor market (employment, unemployment rate and apparent labor productivity). Four fiscal variables (overall budget balance, primary balance, interest on government debt and consolidated government debt stock, presented as a percentage of GDP) are also included. The projections for each institution were collected from public reports released since the year 2000.

 

Practical Application Example

In this Blog post, we present a case study of the most interactive interface of this database, focusing on a recent episode: the inflationary crisis of 2022 and 2023. This episode can be analyzed from different perspectives:

 

Through the evolution of the weighted average projection for the following year's (t+1) inflation rate. Chart 1 illustrates that between the sovereign debt crisis (2012) and the beginning of 2022, the one-year ahead inflation outlook remained low at around 1-1.5%, well below the ECB's monetary policy target of 2%. However, since the beginning of 2022, with the rise in commodity prices and Russia's invasion of Ukraine, inflation has increased substantially. This episode also affected the inflation expectations of institutions, which quickly adjusted their projections to this new reality. Thus, in this period, inflation expectations reached values close to 3.5%. However, after the ECB tightened monetary policy and the commodity prices shocks faded, inflation began to converge towards the reference value. The projections of the main institutions follow this trajectory, but have remained at a level higher than what has been observed, on average, since 2012, and only comparable to the levels observed in 2008.

 

Chart 1 – Inflation (CPI or HICP) – evolution of the weighted average projection of the various institutions for a one-year ahead horizon (t+1)

 

Through the evolution of the weighted average projection for the two years ahead (t+2) inflation rate. As expected, it is less volatile (Chart 2), particularly around the episode of the inflationary crisis, identifying it mostly as transitory. After reaching around 1% in January 2021 (which reflects expectations for 2023 at the time), the weighted projections reached 2.2% in January 2023.  Despite its recent slow-down, two-year ahead expectations remain at higher levels than those registered before 2022.

 

Chart 2 – Inflation (CPI or HICP) – evolution of the weighted average projection of the various institutions over a two-year ahead horizon (t+2)

 

Through the evolution of the projection for a given year, identifying the range of maximum and minimum projections, or the individual projections of each institution. Looking at the evolution of the average projection for the inflation rate in 2023 (Chart 3 and Chart 4), it can be observed that, until March 2022, the weighted average projection remained stable at just above 1%. However, with the onset of the inflationary crisis, institutions began to gradually revise their outlook for the inflation rate upwards, until they stabilized at values around 5-6%. Subsequently, since the end of 2022, the weighted average projection has remained stable, around this figure, and close to the actual value.

 

Chart 3 – Inflation (CPI or HICP) – evolution of the weighted projection for 2023

 

Chart 4 – Inflation (CPI or HICP) – evolution of the weighted projection for 2023

 

Conclusion

A number of future developments of this platform are being planned and prepared. These will involve the construction of a public database with the vintages for the variables referenced here, as well as the use of the comparative table of the various projections for the construction of confidence intervals/bands, using the weighted averages already available. 

 

These developments benefit from feedback from the users. As it is a new tool, its use, regular or occasional, will reveal new potential paths for its evolution. The CFP therefore invites you to send suggestions for improvement and other questions about the project. 

 

Disclaimer:

This database was compiled by the CFP's technical staff through the collection of the information from around 350 macroeconomic and/or fiscal scenarios published by a group of six national and international institutions. Particularly for less recent publications, the absence of information in public databases or spreadsheets meant that the data had to be collected manually. This increases the likelihood of occasional errors in the figures presented. In methodological terms, the macroeconomic scenarios analysed used different indicators at different points in time to measure a certain similar theoretical concept: inflation rate (CPI, HICP, private consumption deflator), investment (GFCF, GCF) and employment (labour force survey concept or national accounts). The time horizons used, the level of detail of the scenarios and the format in which they are presented by each institution have also evolved over time, so it has not been possible to compile complete and exhaustive projections for all the indicators that make up this repository.

 


[1] It is important to note that the estimates of all institutions are designated as projections, since they result from no policy change projection exercises, i.e., they do not assume any change in monetary or budgetary policies, with the exception of the Ministry of Finance's estimates, which, as they already include the impact of economic policy measures already in force or announced with a sufficient degree of detail, are designated as Forecasts.

[2] It is important to note that the inflation rate is measured as the annual rate of change of three alternative variables by the different institutions in different periods: Consumer Price Index (CPI), Harmonised Index of Consumer Prices (HICP) and implicit deflator of private consumption. This discrepancy observed over time is due, on the one hand, to the insufficiency of available observations for several variables, and on the other hand, to the change in international conventions that define the best approximation (best proxy variable) to the inflation rate of a given economy.

Date of last update: 11/12/2024

Macroeconomics . 11 December 2024