Bank of Portugal Cuts 2026 Growth Forecast to 1.8% as Energy Shock Bites

Portugal's central bank has sharply revised down its economic outlook for 2026, cutting its GDP growth forecast from 2.3% to 1.8% while simultaneously raising its inflation projection — a combination that signals a more challenging environment for residents, businesses, and investors in the months ahead.

The Bank of Portugal's latest economic bulletin, released in late March, identifies two primary forces behind the downgrade. The first is the dramatic spike in global energy prices triggered by US-Israeli military strikes on Iran in late February, which sent crude oil surging from around $63 per barrel to over $100, while European natural gas prices nearly doubled. The second is the infrastructure and agricultural damage caused by Storm Kristin and prolonged heavy rains in January and February, which affected 68 municipalities — roughly 17% of Portugal's population.

Flat Start to the Year

The central bank now projects GDP growth of approximately 0% in the first quarter of 2026, with a gradual recovery to around 0.4% per quarter thereafter. For the full year, this produces the headline 1.8% growth figure — down from 2.3% in the November forecast and well below the 2.4% Portugal recorded in 2025.

Inflation is now expected to average 2.8% for 2026, up from the previous 2.1% forecast. In a more severe scenario — one involving prolonged Middle East conflict and sustained high energy prices — the Bank of Portugal warns that inflation could exceed 4% and economic growth could fall below 1.5%.

Unemployment and Longer-Term Outlook

Despite the downgrade, unemployment is expected to remain relatively contained at 5.9% this year. The medium-term outlook has also been revised downward, with growth of 1.6% projected for 2027 and 1.8% for 2028 — reflecting structural headwinds including demographics, reduced inflows from EU recovery funds, and the fading tailwind from post-pandemic normalisation.

Portugal still outperforms the eurozone average, but that gap is narrowing.

What This Means for Expats and Investors

For those holding Portuguese assets or planning to invest, the revised outlook matters in several interconnected ways. Slower growth typically compresses returns on commercial real estate and business investment, while rising inflation erodes purchasing power — particularly relevant for retirees on fixed income living under the NHR regime.

The energy price shock also feeds directly into utility bills, transport costs, and services inflation. Expats on variable-rate mortgages face a further headwind: the Bank of Portugal's revised inflation forecasts are one of the drivers behind expectations of ECB rate hikes later this year (see our companion article on Euribor's recent surge).

The storm damage element is more localised, but it has delayed construction activity and supply chains in affected regions, contributing to upward pressure on property renovation and labour costs.

The Bank of Portugal will release its next full economic bulletin in June, at which point energy market dynamics and the pace of ECB policy normalisation will likely determine whether the 1.8% forecast holds — or needs to be revised again.

Source: Bank of Portugal Economic Bulletin (March 2026), ECO / eco.sapo.pt