IMF Slashes Portugal Growth to 1.9% and Sees Inflation Jumping to 3.1% — Budget Assumption Now Outdated

The International Monetary Fund has cut its growth forecast for Portugal to 1.9 per cent in 2026 and warned that inflation will more than double earlier projections, reaching 3.1 per cent this year as the Middle East conflict sends energy costs spiralling through the economy.

The revised figures, published in the IMF's April 2026 World Economic Outlook on 14 April, represent a 0.2-percentage-point reduction from the Fund's October 2025 estimate and sit well below the 2.3 per cent growth assumption underpinning Portugal's state budget — a target that multiple analysts now describe as totally outdated.

Energy Shock Drives the Downgrade

The IMF attributes the bleaker outlook primarily to the ongoing conflict in the Persian Gulf region, which has pushed global oil prices sharply higher and created persistent uncertainty across European supply chains. Portugal's energy CPI surged to 5.8 per cent year-on-year in March, contributing more than half of the overall inflation increase that month and pushing headline inflation to 2.7 per cent — already well above the European Central Bank's two-per-cent target.

The Fund now expects Portuguese inflation to average 3.1 per cent across 2026, a dramatic upward revision from the 2.1 per cent it forecast just six months ago. In the eurozone as a whole, inflation is projected at 2.6 per cent, meaning Portugal faces a steeper price squeeze than most of its single-currency partners.

ECB Rate Rises Back on the Table

Perhaps the most consequential element of the new outlook is the IMF's expectation that the European Central Bank will be forced to raise its benchmark interest rate from the current 2.0 per cent to 2.25 per cent in the near term, with a possible further increase to 2.5 per cent by the end of the year. For Portuguese households already stretched by record house prices — which rose 17.6 per cent on average in 2025 — any reversal in the rate-cutting cycle would be a significant blow to affordability.

The Bank of Portugal had already moved in the same direction in December, cutting its own growth forecast by half a percentage point to 1.8 per cent, the lowest among major institutional projections. Consumer confidence indicators have deteriorated in recent months, with the economic climate index falling to 2.4 per cent in March from 2.8 per cent in February.

Silver Lining on Jobs and Debt

Not all the numbers point downward. The IMF actually improved its unemployment forecast, projecting 5.9 per cent for 2026, down from the 6.3 per cent it predicted in October. Public debt is expected to continue its downward trajectory, reaching 85.6 per cent of GDP this year and declining further to 74.4 per cent by 2031.

However, the Fund simultaneously revised its budget balance projection from a balanced position to a deficit of 0.1 per cent in 2026, widening to 0.2 per cent in 2027 and 0.9 per cent by 2029. Finance Minister Joaquim Miranda Sarmento had already acknowledged the risk, warning earlier this month that exceeding a 0.5 per cent deficit would expose Portugal to EU fiscal scrutiny.

A Growth Gap That Matters

The widening gap between the government's budget assumptions and external forecasters' reality checks creates a policy problem. If growth undershoots the 2.3 per cent target by even a few tenths, tax revenues will come in below plan and social spending pressures will intensify — particularly given the IMF's call for Portugal to rein in automatic spending growth on healthcare and pharmaceuticals.

Globally, the Fund expects GDP growth of 3.1 per cent in 2026 and 1.8 per cent across advanced economies. The eurozone sits at just 1.1 per cent, underscoring how even Portugal's reduced 1.9 per cent would represent outperformance relative to the bloc — but not enough to maintain the catch-up momentum the government had been counting on.