Portuguese economy defies turmoil as 2% growth comes within reach

Portugal’s economy has emerged from a turbulent first half of the year in considerably better shape than expected, making annual growth of around 2% increasingly likely — and raising the possibility that it could go even higher.

Gross domestic product grew by 0.8% between April and June, comfortably exceeding economists’ forecasts. INE National Statistics Institute has also revised first-quarter growth marginally upwards, from zero to 0.1%.

The figures suggest that neither the damage caused by the winter storms, nor the energy crisis resulting from war in the Middle East, has depressed economic activity as severely as feared.

Economists consulted by Expresso now believe Portugal could come close to the government’s 2% forecast for 2026. Some say growth could reach between 2.2% and 2.3% — the original target set in this year’s State Budget.

“If GDP grew by zero in each of the next two quarters, it would still grow by 1.9% over the year as a whole,” Santander Portugal chief economist Rui Constantino told the newspaper.

Santander is retaining its existing 1.8% forecast until more information is available on domestic demand and economic activity during the third quarter. But Constantino acknowledged that the risks to that forecast are now “tilted to the upside”.

BPI chief economist Paula Carvalho reached a similar conclusion. The bank also forecasts growth of 1.8%, but now accepts that this could be revised towards 2%.

Portugal would need average quarterly growth of only around 0.2% during the remainder of the year to reach that level, she explained. By comparison, quarterly growth has averaged 0.6% since 2018 and 0.5% during 2024 and 2025.

Oxford Economics had expected Portugal to outperform the broader consensus, but its forecast of approximately 0.5% quarterly growth still fell well short of the 0.8% recorded.

Economist Ricardo Amaro said the stronger second quarter, combined with INE’s slight upward revision of the first-quarter figure, pointed towards annual growth of between 2.2% and 2.3%.

Millennium BCP’s economic research department expects growth “close to 2%”, while João Borges de Assunção, a professor at Católica-Lisbon, said that figure was within his own forecast range.

What is keeping the economy moving?

Household spending remains one of Portugal’s principal economic engines, supported by high employment, rising real incomes and comparatively healthy savings.

The country’s reduced level of household and corporate debt has also made it less vulnerable than during previous economic shocks.

Many homeowners now have mixed-rate mortgages under which interest rates are fixed for periods of two to four years. This has provided some protection against increases imposed by the European Central Bank.

Exports also recovered during the second quarter. Preliminary INE data indicates that exports of goods and services exceeded imports in volume terms, allowing foreign trade to contribute positively to growth.

More detailed figures will be released at the end of August.

Investment appears to be the weaker element. Carvalho said there were signs that it had slowed after particularly strong growth over recent quarters.

The less flattering explanation

The headline GDP figure does not necessarily mean that Portugal has become significantly more productive.

Borges de Assunção noted that while GDP grew by 0.8% during the second quarter, the active population increased by 0.9%.

In practical terms, this means output per economically active person may have fallen slightly.

Recent economic growth appears to have been driven substantially by an expanding workforce rather than productivity gains, he said. That model may prove difficult to sustain over the medium term if growth in the active population slows.

War remains the greatest threat

The figures show that Portugal — like much of Europe — has so far resisted the economic effects of the Middle East conflict and associated energy pressures better than anticipated.

That resilience should not be mistaken for immunity.

A new escalation between the US and Iran could push energy and other commodity prices sharply higher, reducing household spending and increasing costs for businesses.

“The signal for the rest of the year requires caution,” Borges de Assunção warned.

Carvalho similarly highlighted the risk of a more disruptive rise in energy prices, which would have damaging consequences for economic activity worldwide.

Better news for the State’s accounts

Stronger employment and consumption are also increasing tax revenue.

Income tax and VAT receipts — both particularly sensitive to economic conditions — rose during the first half of the year, according to the latest budget execution figures.

This could help the government absorb an additional €1.2 billion in expenditure to support people and businesses affected by the storms at the start of the year.

Portugal recorded a small budget deficit at the end of June. But without payments of overdue National Health Service bills and the loss of tax revenue caused by payment moratoriums for storm victims, the State would have reported a surplus.

The Finance Ministry expects the full-year budget to be balanced.

The Public Finance Council is marginally more optimistic, forecasting a surplus equivalent to 0.1% of GDP. The Bank of Portugal predicts a deficit of 0.2%.

All remain within Finance Minister Joaquim Miranda Sarmento’s maximum deficit threshold of 0.5%.

The government thus has some unexpected breathing room. Reaching 2% growth no longer looks like the isolated optimism it appeared to be only a few months ago — although war, energy prices and the country’s stubborn productivity problem could still spoil the ultimate result.

Source: Expresso

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