The Banco de Portugal revises this year’s growth downwards by 0.5 percentage points, reflecting a deteriorating international environment as a result of the conflict in the Middle East, which led to an increase in energy prices and an expectation of worsening financing conditions. Extreme weather events at the start of the year and weaker developments in activity at the end of 2025 compared with those projected in December also contributed to the downward revision. This adverse environment is mitigated in 2026 by a robust labour market, the implementation of the RRP and an expansionary fiscal policy. In 2027 and 2028, activity will be constrained by a slowdown in labour supply and a decrease in European funds.
Over the projection horizon, domestic demand will be the main driver of growth. The Portuguese economy will continue to grow above the euro area average, although the differential will narrow over the horizon.
The labour market will remain robust, with unemployment stabilising at historically low levels. Job creation will slow down, due to lower migration flows and a more contained increase in the participation rate.
Inflation is expected to rise to 2.8% in 2026, reflecting rising external pressures. The conflict in the Middle East largely explains the upward revisions of inflation in 2026 and 2027. The dissipation of the effect of the energy shock on prices and the maintenance of anchored long-term inflation expectations should contribute to reducing inflation to 2% in 2028.
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