Economic growth in Portugal is set to gradually pick up over the forecast horizon, supported by private consumption and investment. Headline inflation is projected to continue easing amid moderating employment growth and a marginal drop in unemployment. Portugal’s general government surplus is forecast to decrease, with increasing pressures on current expenditure alongside balance-deteriorating revenue fiscal policy measures.
| Indicators | 2024 | 2025 | 2026 |
|---|---|---|---|
| GDP growth (%, yoy) | 1,7 | 1,9 | 2,1 |
| Inflation (%, yoy) | 2,6 | 2,1 | 1,9 |
| Unemployment (%) | 6,4 | 6,3 | 6,2 |
| General government balance (% of GDP) | 0,6 | 0,4 | 0,3 |
| Gross public debt (% of GDP) | 95,7 | 92,9 | 90,5 |
| Current account balance (% of GDP) | 0,9 | 0,6 | 0,4 |
Growth slows down in 2024 but is set to pick up again in 2025 and 2026
Economic growth slowed down in the first half of 2024 in the context of subdued external demand and weak business sentiment. In addition, the end of the cycle for the use of the 2014-2020 EU cohesion funds, allowing spending until end 2023, resulted in substantial deceleration in investment growth at the beginning of the year. However, private consumption accelerated in the second quarter of 2024 on the back of a strong increase in total remuneration of employees. In the external sector, exports and imports rose at similar rates. Across the main business sectors, services and particularly tourism continued to support the economy, despite some moderation. By contrast, manufacturing faced significant difficulties mainly due to weak external demand for goods, while construction was mostly flat. In the third quarter of 2024, the economic sentiment improved, driven primarily by the service sector, but also by less negative expectations in industry. According to Eurostat’s flash estimate, GDP rose by 0.2% (q-o-q) in the third quarter of 2024, keeping the same pace as in the previous quarter.
In full-year terms, growth is forecast to moderate from 2.5% in 2023 to 1.7% in 2024. However, economic activity is projected to rebound to 1.9% in 2025 and 2.1% in 2026, mainly supported by domestic demand. Private consumption is expected to continue benefitting from growth in real wages while the projected acceleration in the implementation of the Recovery and Resilience Plan is set to boost investments. Recent moderation in interest rates is also expected to support both private consumption and investments. In the external sector, foreign tourism is projected to remain an important growth factor, albeit less than in recent years. However, considering the expected rebound in demand for investment goods, imports are forecast to rise faster than exports. Consequently, the current-account surplus is set to narrow in 2025-2026 after a spike in 2024.
Unemployment edges down amid moderating employment growth
Employment growth gradually slowed down to 1.3% (y-o-y) in Q3-2024, according to labour force survey data. Following similar dynamics in the activity rate, unemployment edged down to 6.4% in the same quarter as compared to a year-average of 6.5% in 2023. The working-age population continued to benefit from positive net migration flows while the country’s employment rate remained at record high. Employment growth is projected to moderate further over the forecast period, though still allowing for a marginal decline in the unemployment rate. Although job vacancy rates remained low, some sectors, including manufacturing and construction, reported tight hiring conditions and skill shortages. This is set to keep wage pressures elevated.
Inflation drops further despite upward pressure from tourism-related services
Headline inflation decreased from 5.3% in 2023 to 2.3% (y-o-y) in the third quarter of 2024, reflecting a deceleration across all main HICP components. However, the services index remained substantially above the headline rate mainly due to increased prices of accommodation and catering. Energy prices were also pushed up by increased network fees in the electricity sector in the first half of 2024 but dropped again in the third quarter. Non-energy industrial goods and unprocessed food contributed consistently to the slowdown in inflation. However, prices of processed food decoupled from the index of unprocessed food, rising above headline inflation in the third quarter of 2024. Setting aside monthly volatilities, inflation is expected to continue decreasing over the forecast horizon, broadly in line with the projections for the euro area. In light of the expected increase in real wages, inflation excluding energy and food is projected to decline at a slightly slower pace.
Public debt declining at a slower pace, with a shrinking budget surplus
Portugal’s general government surplus is expected to decrease to 0.6% of GDP in 2024. Government revenue is set to continue expanding, benefiting from the performance of tax revenues and social contributions amid sustained economic activity, higher households’ disposable income, and a resilient labour market. Fiscal policy measures, such as pension lump-sum payments and extraordinary increases in the public wage bill, are weighing on government expenditure. The net budgetary cost of measures to mitigate the impact of high energy prices is estimated at 0.5% of GDP in 2024, compared with 0.8% in 2023.
Portugal’s fiscal stance is expected to remain expansionary over the forecast horizon. The general government surplus is forecast to decrease to 0.4% of GDP in 2025 and, based on a no-policy-change assumption, to 0.3% in 2026. In 2025, this is set to be driven by the impact of fiscal policy measures, such as the reduction in corporate income tax rates, the carry-over impact of the revised personal income tax framework, the planned update of the youth personal income tax regime, and discretionary increases in public wages. Public investment is expected to continue to expand, linked to the implementation of the RRP. The net budgetary cost of energy-support measures is projected to decrease to 0.1% GDP in 2025. Risks to the fiscal outlook are on the downside and relate, among others, to ongoing processes for the financial rebalancing of public-private partnerships.
Portugal’s public debt-to-GDP ratio is projected to continue declining, albeit at a slower pace. Maintained primary balance surpluses and favourable growth-interest rate differentials are forecast to drive the ratio down from 95.7% in 2024 to 90.5% in 2026.