OECD Economic Outlook, Volume 2025 Issue 1

Portugal

Real GDP growth is projected to remain at 1.9% in 2025 and 2026. A tight labour market, minimum wage increases and the decline of historically high savings will raise private consumption. Faster implementation of the Recovery and Resilience Plan (RRP) will boost public investment and consumption. Export growth is expected to slow further due to softening global demand, rising trade barriers and a 10% US tariff on Portuguese goods, including steel and autos. As import prices rise and labour demand remains high, inflation will moderate only slowly to 2.1% in 2026.

Fiscal policy will remain expansionary. Implementation of the RRP, as well as household and corporate tax cuts will raise internal demand, while sustained fiscal surpluses will bring public debt down to 89.8% of GDP in 2026 (Maastricht definition). Lowering entry barriers in services, especially the retail sector, further streamlining regulations, improving counselling for students and workers, and enhancing childcare services would boost investment and productivity. Over the medium term, regular spending reviews would help to address mounting spending pressures from an ageing population and strong investment needs.

Growth is easing

Growth strengthened to 2.8% in the year to the fourth quarter of 2024 before easing to 1.6% in the first quarter of 2025. Employment growth remained strong at 2.2% in the year to March 2025, and labour costs per employee increased by 5.4% in the year to the first quarter of 2025. A strong labour market, tax cuts and disinflation have supported steady gains in real disposable income. Despite rising household savings, private consumption and housing investment accelerated in late 2024. However, domestic demand stagnated in the first quarter of 2025, while the trade balance worsened. Weakening international economic prospects and high uncertainty lowered household confidence in March and April 2025, though business confidence remained above its long-term average.

Portugal

Source: OECD Economic Outlook 117 database.

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Portugal: Demand, output and prices

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Credit to businesses and households recovered through 2024 and continued to expand in early 2025 on the back of easing financial conditions. In 2024, the current account improved further with significant terms-of-trade gains and a historically high trade surplus. Portuguese exporters are facing a standard 10% tariff on goods by the United States as well as specific tariffs on steel, aluminium and the automotive industry. Though direct exports of goods and services to the United States account for only 2.8% of GDP, Portugal also faces weakening external demand from its main European trading partners.

Fiscal policy will remain expansionary

Fiscal policy is set to remain expansionary, with fiscal easing of around 1.5% of GDP expected between 2024 and 2026. Spending from RRP grants is expected to increase from 0.7% of GDP in 2024 to 2.3% in 2025 and 1.7% in 2026, boosting investment and public consumption without affecting the budget balance. Persistent fiscal surpluses will lower public debt to 89.8% of GDP in 2026 (Maastricht definition). Activity will also be supported by increasing disbursements of RRP loans, higher public wages, the indexation of pension benefits, a further reduction in the personal income tax, and business tax cuts. Increasing environmental taxes and efforts to curb tax avoidance will boost public revenues. At the same time, the minimum wage rose by 6.1% in 2025, and a further increase expected in 2026 will raise household incomes.

Growth will soften

GDP is projected to grow by 1.9% in 2025 and 2026. Spending of European funds is boosting investment, but the projected slowdown in global activity and European growth will weigh on exports and private investment. Sustained wage growth and robust employment will raise consumption, especially as inflation and debt servicing costs are set to remain moderate. Tax cuts, increasing social transfers and higher public wages will support household incomes but also slow the decline in inflation. Headline consumer price inflation will moderate to 2.1% in 2025 and 2026 as import prices rise and services price pressures diminish slowly. 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. Global financial tightening and elevated uncertainty could weigh more heavily on private investment and confidence than currently assumed, implying both lower growth and lower inflation.

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, including in human capital, while maintaining public debt on a firmly declining path. Continuing to roll out new accounting standards, developing performance budgeting and reducing tax expenditures would improve the efficiency of public spending and help to shift its structure towards investment. Strengthening environmental and property taxation while protecting vulnerable groups would help to attain ambitious climate goals and make room to lower taxes on low-wage workers. Reducing entry barriers in services, including in the retail sector, would raise investment and productivity. Improved counselling to guide study and reskilling choices and strengthening active labour market policies that focus on smaller firms would reduce skill and labour shortages. Better childcare services for low-income households could further raise the labour force participation of women, further easing labour shortages.