Real GDP is expected to grow by 0.5% in 2026, as in 2025, supported by RRP-fuelled investment. Growth of consumption slows down due to the loss of purchasing power and net exports subtract from growth. In 2027, output is set to grow by 0.6%, supported by a recovery in global trade and price normalisation. Inflation is forecast to increase to 3.2% this year and decrease to 1.8% in 2027. Government deficit is projected to fall from 3.1% of GDP in 2025 to 2.9% in 2026 and 2027. Still, the debt ratio is set to rise further to 139.2% in 2027.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 0.5 | 0.5 | 0.6 |
| Inflation (%, yoy) | 1.7 | 3.2 | 1.8 |
| Unemployment (%) | 6.1 | 5.7 | 5.7 |
| General government balance (% of GDP) | -3.1 | -2.9 | -2.9 |
| Gross public debt (% of GDP) | 137.1 | 138.5 | 139.2 |
| Current account balance (% of GDP) | 1.2 | 0.5 | 0.6 |
Domestic demand dampened by international tensions
In 2025, real GDP grew by 0.5%, driven by a robust expansion in domestic demand but held back by foreign demand. Household consumption rose by 1.1% on the back of strong employment and wage growth, while investment grew by 3.5%. Residential construction activity contracted further, following a sharp decline in 2024, due to the protracted phasing out of tax credits for housing renovation. In contrast, non-residential construction and investment in equipment and intangibles rose steadily, buoyed by RRF funding. Growth in imports of goods and services outpaced that of exports, particularly in goods trade.
The conflict in the Middle East is expected to affect all components of demand. Private consumption is set to decelerate, owing to a reduction in real disposable income, and despite a slight drop in the saving rate. Investment growth is projected to slow compared to 2025, as housing construction falls slightly. The RRF continues to support investment in infrastructure and equipment, although the latter is set to be dampened by geopolitical tensions and rising interest rates. The impact of US tariffs and disruptions in some export markets due to the conflict in the Middle East is anticipated to further upset the goods export outlook while reducing imports. Net exports are thus expected to subtract from GDP growth, albeit less than in 2025.
In 2027, real GDP is forecast to accelerate slightly to 0.6%, as the inflationary shock eases and trade flows increase. Private consumption growth is expected to remain subdued, while investment is constrained by a slowdown in construction activity and equipment purchases following the expiry of the RRF. Net exports are set to contribute positively to GDP growth, as exports increase in line with foreign demand and imports, particularly of investment goods, decelerate.
Slowing employment growth amid steady wages
Employment growth slowed in 2025 and is projected to remain modest over 2026-27. With declining working-age population and stabilising participation rates, the unemployment rate is set to fall further to 5.7% in 2026-27. Wage growth is expected to moderate to below 3%, as renewed inflationary pressures are not fully passed through to wages, amid softening labour demand and the lagged, partial indexation of wage contracts.
Higher energy prices fuel temporary inflation surge
The sharp monthly increase in energy prices as from March 2026 is expected to quickly pass through to other goods and services, driving headline inflation to 3.2% in 2026. However, the assumed moderation of energy commodity prices over the forecast horizon is expected to bring headline inflation below 2% in 2027, even as food and services inflation remains elevated.
Government deficit falls just below 3% of GDP
In 2025, the government deficit declined to 3.1% of GDP, down from 3.4% in 2024. This improvement reflects an increase of 0.3 pps. of GDP in the primary surplus, which reached 0.8% of GDP, while interest expenditure remained stable at 3.9% of GDP. The strengthening of the primary balance was mainly driven by higher current revenues. In particular, a 0.9 pps. rise in social security contributions followed the 2025 changes to the tax wedge, which replaced the cuts in employee social security contributions with a permanent reduction in personal income taxation. Despite these changes, income tax revenues continued to grow, supported by favourable labour market conditions, alongside increased tax revenues from financial assets and VAT. At the same time, capital expenditure exceeded expectations, with investment spending reaching 3.8% of GDP, supported by the implementation of RRF projects, subsidies for firms’ green and digital investments, and spending on housing renovation tax credits, which amounted to 0.4% of GDP, significantly higher than anticipated by the government (0.05% of GDP).
In 2026, the deficit is projected to narrow marginally, to 2.9% of GDP. Interest expenditure is set to increase by 0.3 pps. of GDP, due to rising yields, particularly on inflation-linked bonds. Tax revenues are expected to increase in line with nominal GDP. The 2026 budget introduced changes to income taxation, including a further cut to the labour tax wedge for middle income earners, to be fully compensated by increases in taxes for financial institutions and insurance companies. On the expenditure side, the decrease in subsidies to investments is partially compensated by further public investment, strengthened by RRF funds, and primary current expenditure. The energy support measures introduced before 4 May 2026 – amounting to 0.06% of GDP – have been entirely financed by budgetary savings.
The deficit is projected to remain stable in 2027 under a no-policy-change assumption. The lagged effects of higher inflation are expected to push up current expenditure, particularly on pensions, while the phase-out of RRF-related projects will lead to lower capital expenditure.
The government debt-to-GDP ratio is set to reach 139.2% by the end of 2027, from 137.1% in 2025. The increase is driven by a debt-increasing interest-growth-rate differential and large stock-flow adjustments related to the housing renovation tax credits affecting the deficit in previous years, while the debt-reducing impact of primary surpluses remains limited.