Portugal among most vulnerable to stagflation scenario – Moody’s

US agency Moody’s warned on Tuesday that the war in Ukraine is increasing the risk of stagflation in the European Union (EU), putting Portugal among the most vulnerable countries in inflation exposure. “The conflict has exacerbated underlying demand and supply issues and pushed inflation to levels not seen in the EU since the mid-1980s,” Moody’s senior analyst Heiko Peters said, quoted in a document released this Tuesday.

Similarly, the analyst points out that “a halt of Russian natural gas supplies would likely intensify these pressures. European Commission surveys suggest a further acceleration in inflation is likely in the near term.” Moody’s currently sees EU GDP growing 2.5% in 2022 and 1.3% in 2023 and the consumer price inflation (CPI) decelerating to 4.4% in 2023 from 6.8% in 2022.

Still, changes in supply and demand regionally and internationally, along with structural changes, “including the transition of EU countries away from Russian energy imports have increased risks of stagflation.” For stagflation to happen, however, Moody’s points out that price dynamics would have to be held down by factors such as “higher-for-longer energy prices.” In addition, “a growth-supporting fiscal-monetary policy mix could increase the risk of a stagflation scenario.”

Moody’s further warned of southern Europe’s exposure to this phenomenon. “Based on a number of indicators that suggest differences in the exposures to engrained inflation, significantly lower growth and in the policy response functions, we see southern Europe most exposed to a stagflation scenario,” said the agency.

“The countries combining the highest likelihood to see transitory price increases become permanent and the lowest policy capabilities are Malta , Cyprus , Portugal , Slovenia and Croatia,” Moody’s explained. Portugal is also considered the seventh most exposed country to inflation by the rating agency.