Ever gloomy, ever versatile, Fernando Pessoa, the literary giant of the XXth century, has been summoned back from the dead for some after-life extra hours. The bored-office-clerk-turned-cultural-icon's name now serves as the acronym of the latest model of the Portuguese economy at the Bank of Portugal. As its authors state "PESSOA is a New-Keynesian DSGE model for a small open economy participating in a monetary union... with a rich fiscal policy setup" (more info here and here). Fittingly, as seen through Pessoa's eyes, Portugal's outlook is, well... kind of sad.
In one of many interesting exercises, the authors kindly ask Pessoa to go through the following thought experiment: what would happen if, starting in 1999, the Portuguese economy went through ten years of abnormally low productivity? Gloomy Pessoa answers with a graph:
The dismal performance of consumption, investment and hours, the deterioration of the net foreign asset position and the loss of competitiveness in tradable goods, all so familar from previous posts, show up with a vengeance in Pessoa's graph.
But surely, you might object, this is way off. As bad as things are, we did not experience a great depression style 12% fall in GDP. Well, in that case, an ever resourceful Pessoa will tell you a thing or two about mitigating factors: think about the permanent (?) decrease in risk premia and the easing of credit conditions associated with the euro or the fiscal policy expansion-tightening cycle. Now add up these three factors - productivity, credit and pro-cyclical fiscal policy - and things start looking very familiar.
More worringly, Pessoa's assumption of temporarily low productivity starts to sound a bit like wishful thinking. Now that the credit boom has ran its course and that fiscal policy has its hands tied, some mean reverting manna from heaven would indeed be great news. Otherwise the graph above will not be telling us the story of the last decade but that of the coming one.