The economic outlook has weakened somewhat due to a series of adverse shocks but growth is expected to remain sound in both 2026 and 2027. Headline inflation is projected to increase in 2026 due to higher energy prices before receding in 2027. Unemployment is set to marginally decline amid lower employment and labour supply growth. The general government surplus is forecast to turn into a small deficit in 2026 and 2027. After dropping below 90% in 2025, public debt is set to remain on a downward trajectory.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 1.9 | 1.7 | 1.8 |
| Inflation (%, yoy) | 2.2 | 3.0 | 2.3 |
| Unemployment (%) | 6.0 | 5.9 | 5.8 |
| General government balance (% of GDP) | 0.7 | -0.1 | -0.4 |
| Gross public debt (% of GDP) | 89.7 | 87.6 | 86.0 |
| Current account balance (% of GDP) | 1.0 | 0.1 | 0.2 |
Economic outlook weakens amid series of shocks
Portugal’s economy faced a series of unexpected shocks at the beginning of 2026, starting with severe storms in January and February, followed by a steep surge in energy prices in March and April. Consequently, the economic sentiment deteriorated and GDP growth slowed from 0.9% q-o-q in 2025-Q4 to a preliminarily estimated standstill in 2026-Q1. Although retail sales remained resilient, consumer confidence dropped to a two-year low. However, the business sentiment indicators, particularly in the services sector, regained ground after a dip in January, pointing to the resilience of the economy. Overall, domestic demand continued to contribute positively to growth in 2026-Q1, despite the slowdown from the previous quarter, while the contribution of net exports remained negative.
Economic growth is projected to gradually improve in quarter-on-quarter terms over the forecast horizon, helped by repair works following the storm damage and the expected peak in the use of RRF funds in 2026. However, elevated energy prices are still set to weigh negatively, particularly in 2026-Q2. In full-year terms, growth is forecast to drop only marginally from 1.9% in 2025 to 1.7% in 2026 and 1.8% in 2027. Investments are projected to benefit substantially from the RRF cycle in 2026, partly offsetting the negative investment sentiment in the private sector. In 2027, the steep fall in RRF-related investments is projected to be partly offset by a rebound in EU structural funds and improving sentiment in the private sector. The current account surplus is forecast to move very close to a balanced position in 2026 and 2027, as imports are set to continue growing faster than exports while the negative energy price effect in 2026 is only expected to be partly recovered in 2027. The balance of risks remains on the downside, further exacerbated by uncertainty related to global jet fuel supplies, given that Portugal’s large tourism sector is strongly dependent on air travel.
Employment and wage growth set to moderate
After a strong increase in 2025, employment growth is projected to moderate in 2026, reflecting the weaker economic outlook and slower migration inflows, which are expected to limit labour supply. Wage growth is also projected to slow down but to continue exceeding inflation, as the labour market remains relatively tight amid a record-high employment rate. Despite the country’s low job vacancy rate overall, significant labour shortages are reported in construction, IT, and medical services. Unemployment is forecast to edge down from 6.0% in 2025 to 5.9% in 2026 and 5.8% in 2027. Unit labour costs are set to moderate, broadly in line with developments in main trading partners.
Inflation rebounds due to energy prices
Headline inflation increased from 2.2% in 2025 to 2.7% y-o-y in March 2026 due to a steep rise in international energy prices. The main transmission channel was limited to fuel prices while wholesale electricity prices remained comparatively low in Portugal, benefiting from the high level of water reservoirs and the high share of renewables in the domestic power production. Headline inflation is expected to peak in 2026-Q2 and to gradually recede afterwards as the spike in energy prices is set to have only a moderate lagged effect on energy-intensive goods and services. In full-year terms, headline inflation is forecast to reach 3.0% in 2026 before decreasing to 2.3% in 2027. Core inflation excluding energy and food is set to increase at a slower pace to 2.4% in both 2026 and 2027.
Budget surplus projected to turn into deficit over the forecast horizon
The budget balance in 2025 turned out better than expected, with Portugal recording a surplus of 0.7% of GDP. This outcome was driven by lower-than-initially budgeted capital expenditure, also related to RRF loans, despite a 0.3 pps. increase compared to 2024. In addition, tax revenues and social contributions each grew by 0.2 pps. of GDP, benefitting from the sustained economic activity and dynamic labour market whereas interest expenditure was 0.1 pps. of GDP lower.
The general government surplus is forecast to slip into a deficit of 0.1% of GDP in 2026 and 0.4% of GDP in 2027, assuming unchanged policies. In 2026, the expected decline reflects the impact of government support measures taken in response to the series of storms in January and February. The decline of the general government balance in 2026 and 2027 also results from previously introduced balance-deteriorating measures such as reductions in personal and corporate income tax rates. The fiscal outlook faces risks related mainly to financial weaknesses in state-owned enterprises and contingent liabilities from public-private partnerships. Portugal’s fiscal stance is set to expand further in 2026 before shifting to a contractionary stance in 2027 as RRF funds taper off.
Public debt fell from 93.5% of GDP in 2024 to 89.7% of GDP in 2025. Over the forecast horizon, the downward trend is projected to continue, albeit at a slower pace. It is forecast to reach 86.7% of GDP in 2026 and 86.0% of GDP in 2027 on the back of persisting primary balance surpluses and favourable growth-interest rate differentials.