OECD cuts Portugal's growth forecast and predicts budget deficit
OECD highlights weakening exports due to slow global demand, rising trade barriers, and 10% U.S. tariffs on Portuguese steel and cars.
The Organisation for Economic Co-operation and Development (OECD) has downgraded Portugal’s economic growth forecast and now anticipates the country will return to a budget deficit by 2026, reversing earlier surplus projections.
In its latest Economic Outlook released Tuesday, the OECD projects Portugal’s GDP will grow by 1.9% in both 2025 and 2026, a slight downgrade of 0.1 percentage points from its previous forecast.
More notably, it forecasts a fiscal deficit of 0.3% of GDP in 2026, ending the government’s brief streak of positive balances.
“The economy is slowing,” warns the OECD, noting that after a strong end to 2024, when GDP grew by 2.8% in Q4, momentum cooled to 1.6% in Q1 2025.
This downward revision puts the OECD’s outlook below that of Portugal’s central bank, which expects GDP growth of 2.3% in 2025 and 2.1% in 2026.
Export Headwinds and U.S. Tariffs
The OECD points to weakening exports as a key concern, hampered by sluggish global demand, rising trade barriers, and new U.S. tariffs of 10% on Portuguese goods including steel and automobiles.
Exports are expected to decelerate sharply, growing just 1.3% in 2025 and 2.6% in 2026, down from 3.4% in 2024.
Imports are also set to slow, with projected growth of 2.3% this year and 2.7% next.
Despite these external challenges, domestic demand remains a bright spot.
A tighter labor market, rising minimum wages, and a drawdown in household savings are expected to boost private consumption.
Diverging Forecasts
While the OECD now forecasts a 0.3% deficit in 2026, this remains more optimistic than Portugal’s Fiscal Council, which predicts a 1% shortfall.
The Bank of Portugal expects a smaller deficit of 0.1%. All three forecasts contrast with the government’s own projections, which still expect a budget surplus through 2026.
The European Commission also revised its forecasts this week, predicting a 0.6% budget deficit in 2026, a downgrade from its previous 0.4% surplus estimate.
It also sees GDP growing by just 1.8% in 2025, before rebounding slightly to 2.2% in 2026.
Structural Reforms Urged
To counteract headwinds, the OECD emphasizes the need for structural reforms to support long-term growth.
It recommends reducing barriers to entry in the services sector, simplifying regulations, and improving career guidance systems for students and workers.
Medium-term, the OECD warns that rising costs tied to an aging population and investment needs will place increasing pressure on public finances.
It urges regular expenditure reviews to maintain fiscal sustainability.
Inflation and Labor Market Outlook
Inflation remains a concern, with the OECD expecting a slow decline to 2.1% by 2026.
High import costs and strong labor demand are sustaining price pressures.
Meanwhile, the European Commission forecasts inflation easing to 2.1% in 2025 and 2.0% in 2026, supported by falling oil and commodity prices.
Portugal’s labor market is expected to remain tight, with the unemployment rate projected to drop slightly from 6.5% in 2024 to 6.3% in 2026.
Wage growth is forecast to continue outpacing GDP, especially in sectors like IT and construction.
Government Bets on Recovery Funds
Despite the slowdown, Portugal’s expansionary fiscal policy, notably through the Recovery and Resilience Plan (PRR), is seen as a crucial growth driver.
The OECD highlights that faster PRR implementation could offset the drag from exports, supporting investment and public consumption without further worsening the budget balance.
According to the OECD, investment is projected to grow by 3.2% in 2025 and 3.7% in 2026, while public consumption will rise by 1.2% and 1% respectively.