Domestic demand is set to continue supporting economic growth in Portugal while exports of goods face significant headwinds due to global trade tensions. Headline inflation is projected to continue easing amid moderating employment and wage growth and a marginal drop in unemployment. Portugal is expected to continue to pursue an expansionary fiscal policy, turning the general government surplus into a deficit by 2026.
| Indicators | 2024 | 2025 | 2026 |
|---|---|---|---|
| GDP growth (%, yoy) | 1,9 | 1,8 | 2,2 |
| Inflation (%, yoy) | 2,7 | 2,1 | 2,0 |
| Unemployment (%) | 6,5 | 6,4 | 6,3 |
| General government balance (% of GDP) | 0,7 | 0,1 | -0,6 |
| Gross public debt (% of GDP) | 94,9 | 91,7 | 89,7 |
| Current account balance (% of GDP) | 1,7 | 1,2 | 0,9 |
Economic activity to retain sound growth path despite headwinds
Following a strong rebound in the last quarter of 2024, Portugal’s economy contracted by 0.5% (q-o-q) in the first quarter of 2025. This was mainly driven by retroactive wage tax adjustments that temporarily pushed up disposable income in late 2024. Both private consumption and savings increased substantially and were followed by a correction at the beginning of 2025. In addition, business and consumer sentiments deteriorated in the first quarter of the year facing high geopolitical uncertainty. By contrast, exports of goods increased, most likely due to anticipation of sales ahead of the forthcoming US tariff hikes. Across the main business sectors, services continued to support the economy, helped by solid income growth.
The escalation of global trade tensions in April is expected to weigh on Portugal’s economic performance in the coming months. By contrast, the projected acceleration in the implementation of the RRP is set to boost investments along with two large private projects in the car industry. In the external sector, imports are projected to grow faster than exports but the current account is expected to remain in surplus, benefiting from lower energy prices.
Growth is forecast to moderate from 1.9% in 2024 to 1.8% in 2025 as the strong domestic demand is offset by setbacks in external demand. In 2026, growth is expected to improve to 2.2%. While Portugal’s direct exposure to the US market is relatively limited, risks of significant indirect setbacks remain high and relate to global trade disruptions and uncertainty. On the positive side, Portugal’s recent increase in household savings and possible expenditure switching towards domestically produced goods could result in higher than projected demand. All in all, the balance of risks is tilted to the downside as the high level of external risks appears only partly offset by domestic factors.
Labour supply and employment keep rising, helped by migration
Unemployment remained relatively stable at 6.5% in 2024 and the first months of 2025 as both employment and labour supply continued to rise at a strong pace, helped by net migration. The employment rate for the age group of 16-74 reached a new historic high of 64.1% in 2024. Employment growth is projected to moderate somewhat this year but still lead to a marginal drop in unemployment to 6.4% in 2025 and 6.3% in 2026. Wages are set to continue rising slightly faster than nominal GDP due to tight labour conditions in sectors such as information technologies and construction.
Inflation continues to decelerate
Headline inflation resumed its downward path in the first quarter of 2025 after a temporary uptick in late 2024 driven by energy and services. Given the steep drop in prices of crude oil and other commodities, inflation is projected to ease further in the coming months, slowing down from 2.7% in 2024 to 2.1% in 2025 and 2.0% in 2026. Inflation excluding energy and food is set to remain slightly higher as wage growth and strong domestic demand are expected to keep services inflation elevated albeit in a slight disinflationary trajectory. The price pressure in the tourism sector is also projected to remain relatively high as foreign tourism is expected to continue growing despite tensions in global trade of goods.
Fiscal policy measures put the budget surplus under strain
In 2024, Portugal’s general government balance recorded a surplus of 0.7% of GDP, 0.5 pps. of GDP below 2023. Government revenue growth decelerated reflecting fiscal policy measures as the reduction in personal income tax rates. This was partly offset by the higher receipts from the corporate income tax and value-added tax as well as the increased revenue from social contributions. Government expenditure continued to expand on the back of higher public wages and social transfers, particularly related to public pensions.
Going forward, the general government balance is expected to contract to 0.1% of GDP in 2025. Current expenditure is projected to continue to grow amid fiscal policy measures that increase public wages and pensions. Public investment is expected to pick up significantly in 2025. At the same time, government revenue growth is forecast to decelerate. Direct taxation policy measures, as the broadening of the youth personal income tax scheme, are projected to weigh on tax revenues. Social contributions are expected to remain resilient on the back of sustained economic activity and households’ higher disposable income.
Portugal’s fiscal stance is expected to remain expansionary in 2026 based on a no-policy change assumption. For next year, the general government balance is forecast to turn into a deficit of 0.6% of GDP. This reflects the impact of fiscal policy measures as the reduction of the corporate income tax rate and public investment financed by RRF loans. Risks to the fiscal outlook are on the downside and relate, among others, to ongoing financial rebalancing requests of public-private partnerships and to financial vulnerabilities in the state-owned enterprise sector.
After recording 94.9% of GDP in 2024, nearly 3.0 pps. below 2023, Portugal’s public debt-to-GDP ratio is projected to continue declining. It is forecast to reach 91.7% in 2025 and 89.7% in 2026, driven by primary balance surpluses and favourable growth-interest rate differentials.