Output growth is set to slow down to 0.4% in 2025, with net exports subtracting 0.7 pps. and domestic demand contributing around 1 pp., driven by investment. Growth is expected to pick up in 2026-27, supported by RRF-financed investment. Inflation is projected to remain subdued in 2025-26, mainly thanks to the protracted slump in energy prices, and come back up to around 2% in 2027, partly due to the introduction of ETS2. The government deficit is forecast to decline steadily, to 2.6% of GDP in 2027. The debt ratio is set to reach 137.2% of GDP by 2027, as the expected primary surpluses are still insufficient to offset the impact of the debt-increasing interest-growth-rate differentials and stock-flow adjustments.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 0.4 | 0.8 | 0.8 |
| Inflation (%, yoy) | 1.7 | 1.3 | 2.0 |
| Unemployment (%) | 6.2 | 6.1 | 6.0 |
| General government balance (% of GDP) | -3.0 | -2.8 | -2.6 |
| Gross public debt (% of GDP) | 136.4 | 137.9 | 137.2 |
| Current account balance (% of GDP) | 1.0 | 0.9 | 0.9 |
Economic output growth driven by the investment cycle
After a slightly negative outturn in the second quarter of 2025, GDP growth remained flat in the third quarter. With a small positive increase projected in the final part of the year, GDP is forecast to grow by 0.4% in 2025. Private consumption is expected to continue expanding at moderate pace, as persistent uncertainty pushes households to increase savings. Investment is set to accelerate, buoyed by RRF-backed non-residential construction projects, while housing investment continues to fall, as the phasing out of tax credits is only partly offset by privately funded works. Goods exports are projected to contract by 0.6%, while services exports are set to increase. Conversely, imports of both goods and services are expected to rise considerably, leading net exports to subtract from GDP growth.
In 2026, private consumption is expected to pick up on the back of rising real disposable incomes. Investment, still propped up by the RRF, is set to continue growing, mainly thanks to construction activity. Net external trade is still forecast to slightly weigh on GDP growth, as exports recover less than imports, which are pulled by strong domestic demand. In 2027, household consumption is set to become the main growth driver, as investment slows down following the end of the RRF. An expected moderation in imports is projected to neutralise the net exports’ contribution to GDP growth. Overall, GDP is forecast to rise by 0.8% in both 2026 and 2027.
Employment growth slows, real wages recover gradually
Labour productivity is set to continue declining this year, as employment is projected to rise by 1% after seeing cumulative growth of 3.5% in 2023-24. With labour demand forecast to slow, productivity is expected to start recovering in 2026-27, benefitting from recent investments. The unemployment rate is forecast to decrease steadily to 5.9% in 2027. Wages are still expected to grow robustly this year and moderate thereafter, as the renewal of collective contracts reflects more recent price developments.
Energy price decreases keep headline inflation down
Inflation dynamics are largely influenced by anticipated fluctuations in energy prices, which, together with a stronger euro, are bringing down import prices in 2025. While global energy prices are expected to remain subdued throughout the forecast horizon, the application of the ETS2 carbon allowances, if not delayed, is projected to drive retail prices for transport and heating fuels up in 2027. At the same time, services inflation is set to fall on the back of wage moderation.
Government deficit set to decline
In 2025, the deficit is projected to decline to 3.0% of GDP from 3.4% in 2024, as the primary surplus rises to 0.9% of GDP. Current primary expenditure is projected to increase by more than 3% in nominal terms, driven by additional spending on social transfers, public wages and healthcare. Public investment is set to increase further, also thanks to RRF-financed projects. On the revenue side, employment and wage growth, higher VAT receipts and positive developments of taxes on financial assets help offset the changes introduced with the 2025 budget to the personal income tax system, aimed at permanently reducing the tax wedge.
In 2026, the deficit is projected to narrow slightly, to 2.8% of GDP. In nominal terms, primary expenditure is set to continue rising, although at a slower pace, with planned savings on both current and capital spending. Expenditure growth is mainly driven by social transfers (including the partial and temporary freeze of the pension age increase), healthcare spending, higher national contributions to the EU budget and a further rise in public investment, also driven by RRF-financed projects. Tax revenues are set to increase, since a rise in taxes for financial and insurance companies, the earlier closure of the petrol-diesel tax differential and measures to improve tax collection fully compensate the cut to the labour tax wedge for middle income earners, the introduction of lower flat taxation on contract renewals, productivity bonuses and overtime and the introduction of a simplified debt settlement for tax collection.
In 2027, the headline deficit is projected to decline marginally based on a no-policy-change assumption, with a 0.1 pps. of GDP increase in interest spending only partly offsetting the further increase projected in the primary surplus.
After a contractionary fiscal stance in 2024-2025, fiscal policy is set to become broadly neutral in 2026 thanks to the additional support from RRF grants. A contractionary fiscal stance is projected again in 2027 also due to the end of the RRF.
The government debt-to-GDP ratio is set to attain 137.2% by the end of 2027. The expected primary surpluses are still insufficient to curb the growth of the debt ratio, due to debt-increasing interest-growth-rate differentials as well as large stock-flow adjustments related to the housing renovation tax credits affecting the deficit in previous years.