OECD Economic Outlook, Volume 2026 Issue 1

Portugal

Real GDP growth is projected to reach 1.8% in 2026 and 1.7% in 2027. Higher energy prices will feed through the economy and inflation will peak at 3.2% in 2026. Strong disbursements of RRP funds, the tight labour market, permanent tax cuts and temporary fiscal support will cushion the impact of energy prices and severe storms on domestic demand in 2026. Export growth will increase progressively with external demand throughout 2027. An incomplete implementation of RRP funded projects or prolonged disruptions to energy markets could dampen the outlook.

Fiscal policy will help to cushion the external shock in 2026, before tightening in 2027. This reflects the phase-out of temporary measures introduced in response to higher energy prices and severe storms, and the expiry of RRP funding. Public debt will continue to decline, but ensuring a sustained downward path in the medium term will require more efficient spending. Expanding access to training and limiting early retirement options would raise employment among older workers, while the effective use of spending reviews would help to rebalancing expenditures towards investment.

Growth has slowed

GDP grew by 2.3% over the year to the first quarter of 2026. Tax cuts, a one-off pension top-up and moderate inflation supported consumption in late 2025. However, extreme weather events and the evolving conflict in the Middle East slowed economic activity in the first quarter of 2026. Annual inflation picked up to 3.3% in April driven by a sharp rise in road fuel prices and still-strong food prices, while core inflation stood at 2.1%. Consumer confidence declined markedly over February to April 2026, while business sentiment softened. Industry and construction production, as well as services turnover, declined over the year to February but rebounded in March, and employment growth stabilised.

Portugal

Source: OECD Economic Outlook 119 database.

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Portugal: Demand, output and prices

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External conditions have weakened, weighing on Portugal’s trade balance. Goods exports have been volatile, shrinking in January and February 2026 but increasing by 10.6% in the year to March 2026 (in nominal terms), while goods imports increased by 11.6%, reflecting partly the closure of refineries at the end of 2025. Although direct exposure to the United States is limited (2.8% of GDP), Portuguese exporters are facing higher tariffs and softer external demand from their main European trading partners. At the same time, despite the expansion of renewable electricity generation capacity, Portugal remains dependent on imported energy, leaving the economy exposed to global price shocks. Policy measures, including road fuel tax cuts in early March, targeted sectoral subsidies and loan support have partly cushioned the impact of rising import prices on households and firms.

Fiscal policy will cushion the slowdown in 2026

Fiscal policy will be expansionary in 2026. An expected fiscal easing of around 2% of GDP will help to cushion the current slowdown. Spending from RRP grants is assumed to increase to close to 2.3% of GDP in 2026, while disbursements of RRP loans will increase to 0.7% of GDP. Temporary measures to cushion the energy price shock, including road fuel tax cuts and subsidies, as well as support for those affected by the early 2026 storms, are set to reach 0.4% GDP in 2026. Activity will also be supported by higher public wages, a further reduction in the personal income tax, business tax cuts and increasing defence spending. In 2027, the fiscal stance will turn contractionary, with an assumed tightening of 2.5% of GDP. The phase out of temporary support, as well as of RRP grants and loans, will weigh on internal demand, despite increasing spending from European cohesion funds. Primary fiscal surpluses and resilient GDP growth will continue to reduce the debt-to-GDP ratio. The minimum wage rose by 5.7% in 2026 and is set to rise by 5.4% in 2027, stimulating wage growth.

Growth will remain resilient

GDP will grow by 1.8% in 2026 and 1.7% in 2027. The increase in energy costs will slow real disposable income gains, despite tax cuts and temporary support measures. Inflation will reach 3.2% in 2026 and moderate to 2.5% in 2027 as international energy prices decline and services price pressures diminish slowly. Weak external demand will weigh on exports, but spending of RRP funds will temporarily boost investment. A further decline in the household saving rate and stronger than-expected wage developments could strengthen consumption but also fuel inflation. Higher than expected public expenditures, notably on defence, could also raise internal demand. By contrast, lower-than-expected disbursements of RRP funds or prolonged disruptions to energy markets could weigh on growth.

Policy should support stronger and more sustainable growth

Sustained productivity growth, higher employment and more efficient public spending are needed to face rapid population ageing and significant investment needs, while keeping public debt on a firmly declining path. Shifting public spending towards investment will require a full roll out the new accrual-based accounting system and an effective use of spending reviews. Consolidating means-tested benefits, reducing tax expenditures and strengthening recurrent taxes on property would support efficiency gains, while reducing early retirement options and rebalancing expenditures on labour market policies towards training and counselling would raise employment. This would make room to expand further and diversify renewable energy production through clear auction timelines and increase resilience to energy shocks. As energy price pressures decline, increasing environmental taxation while protecting vulnerable groups, would help to attain Portugal’s climate goals. Reducing entry barriers in services, including in the retail sector, and simplifying building permitting procedures would raise investment and productivity growth.