Domestic demand is set to continue supporting economic growth in Portugal amid global trade uncertainty. Headline inflation is projected to ease further to 2% in 2026 and 2027, driven by a recent drop in energy and industrial goods prices and a marginal slowdown in services prices. Unemployment is set to further decrease amid strong job creation. Past government balance surpluses are expected to fade with an estimated deficit of 0.3% of GDP in 2026 while public debt is forecast to continue declining to less than 90% of GDP by the end of the forecast horizon.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 1.9 | 2.2 | 2.1 |
| Inflation (%, yoy) | 2.2 | 2.0 | 2.0 |
| Unemployment (%) | 6.3 | 6.2 | 6.1 |
| General government balance (% of GDP) | 0.0 | -0.3 | -0.5 |
| Gross public debt (% of GDP) | 91.3 | 89.2 | 88.2 |
| Current account balance (% of GDP) | 1.1 | 1.0 | 0.6 |
Domestic demand continues to support growth, helped by EU funds
Portugal’s GDP grew by 0.7% q-o-q in the second quarter of 2025, following a contraction of 0.3% in the previous quarter. The flash estimate for the third quarter of 2025 showed a further expansion of 0.8% as a pension bonus and personal income tax refunds paid in August and September boosted consumer demand. Private consumption also benefited from a steady increase in employment and wages along with lower interest rates on household loans. Investment rose strongly as well, reflecting a steep rebound in the construction sector in the second quarter of 2025. Meanwhile, export growth slowed substantially against the backdrop of global trade tensions and uncertainty. Foreign tourism decelerated after several years of strong performance while domestic tourism continued to rise at a strong pace. The Economic Sentiment Indicator recovered from the steep fall between February and April but the latest reading in October confirmed that businesses remained concerned about the economic outlook.
Private consumption is projected to continue growing at a steady pace over the forecast horizon amid increasing household income and a gradual decrease in the high saving rate reported in 2024 and the first half of 2025. Investment is expected to grow even faster than private consumption in 2025 and 2026 when the use of RRF funds is at its peak. In the external sector, imports are set to continue rising faster than exports although the growth differential is expected to narrow as of 2026. Overall, GDP growth is projected to pick up from 1.9% in 2025 to 2.2% in 2026 before edging down to 2.1% in 2027. The country’s current account is expected to remain in positive territory, as the projected surge in import volumes is partly offset by the expected decline in energy import prices in 2025 and 2026.
Labour market remains dynamic as employment breaks new highs
Despite some moderation in tourism, job creation regained momentum during the summer of 2025, contributing to a gradual decline in the unemployment rate to a 12-month average of 6.3% as of August 2025, compared to 6.5% in 2024. Both demand and supply of labour increased at a fast pace, bringing the employment rate to new historic highs in the second and third quarters of 2025. Employment growth is projected to moderate somewhat over the forecast horizon while unemployment is forecast to gradually drop to an annual average of 6.1% in 2027. Wages are expected to keep rising faster than GDP but the corresponding increase in unit labour costs is set to moderate somewhat, broadly in line with developments in main trading partners.
Increase in unprocessed food prices temporarily derails easing of inflation
Headline inflation eased to 2.0% in the second quarter of 2025 but edged up to 2.3% in the third quarter, driven by a notable increase in unprocessed food prices. However, services inflation continued to ease marginally, although still hovering above 3%. Considering the latest drop in energy and industrial goods prices, headline inflation is projected to resume its downward path in the coming months amid a further mild easing in services inflation. For 2025 as a whole, headline inflation is estimated at 2.2%, slowing down from 2.7% in 2024. It is then forecast to ease further to 2.0% in both 2026 and 2027. Headline inflation excluding energy and food is set to remain slightly higher in light of steady household income growth.
Budget balance expected to deteriorate over the forecast horizon
Government revenue growth is forecast to be solid in 2025, only partly offsetting the sustained expansion in government expenditure. As a result, the general government balance is forecast to contract to 0.0% of GDP in 2025, from 0.5% of GDP recorded in 2024. Indirect taxes and social contribution revenues are expected to benefit from the sustained economic activity and dynamic labour market. Nonetheless, direct tax revenue is estimated to grow below nominal GDP, reflecting fiscal policy measures, such as the update of the youth personal income tax scheme and the reduction in personal income tax rates. The sectoral public wages updates and the 2025 pension bonus, among other expenditure measures, are set to weigh on current expenditure. Nationally-financed public investment is expected to remain robust in 2025, partly due to defence investment.
For 2026, the general government balance is forecast to turn into a deficit of 0.3% of GDP, reflecting the impact of new and permanent balance-deteriorating measures. With the steepening of Portugal’s yield curve, interest expenditure is estimated to slightly increase. The general government deficit is expected to remain broadly unchanged in 2027 at 0.5% of GDP. Risks to the fiscal outlook are partly related to financial vulnerabilities in state-owned enterprises and to liabilities with public-private partnerships. Overall, Portugal’s fiscal stance is expected to stay expansionary in 2026, turning contractionary in 2027 amid less support from EU-funded expenditure.
After recording 93.6% of GDP in 2024, 3.2 pps. of GDP below 2023 levels, Portugal’s public debt-to-GDP ratio is projected to continue declining, albeit at a slower pace. It is forecast to reach 91.3% in 2025, 89.2% in 2026 and 88.2% in 2027, driven by primary balance surpluses and favourable growth-interest rate differentials.