March Bulletin: Portugal Cuts 2026 Growth to 1.8 Percent as Energy Shock and Storm Damage Halt First Quarter

The Bank of Portugal has cut its 2026 economic growth forecast from 2.3 percent to 1.8 percent in its March Economic Bulletin, marking a sharp 0.5 percentage point downgrade driven by the energy price shock following the US and Israeli attack on Iran in late February and severe storm damage that brought growth to a standstill in the first quarter.

The revision represents one of the most significant forecast adjustments in recent memory, with oil prices surging to over $100 per barrel—up from $63 in December—while European gas prices nearly doubled from €28 to €51 per megawatt-hour. The central bank now projects inflation at 2.8 percent for 2026, up from the 2.1 percent forecast just three months ago.

"This projection reflects the deterioration of the external environment following the attack launched by the US and Israel on Iran at the end of February," the bulletin states. "The sudden and significant rise in energy commodity prices has a negative impact on activity and a positive impact on inflation, especially in 2026."

Zero Growth in Q1 as Storms and Energy Shock Collide

The Bank of Portugal now projects zero GDP growth in the first quarter of 2026, attributing the stagnation to both the energy shock and the severe weather events that struck the country in late January and early February. Storm Kristin and persistent heavy rainfall caused widespread damage across the Centro region, affecting residential buildings, agricultural land, and critical infrastructure including electricity grids, transport networks, and communications systems.

The government declared a state of calamity in 68 municipalities representing 17 percent of Portugal's population. While reconstruction efforts are expected to provide some economic stimulus later in the year, the immediate impact has been disruptive enough to halt growth entirely in the opening months of 2026.

Growth is expected to recover to 0.4 percent in each of the subsequent quarters, but the overall trajectory for the year has been fundamentally altered.

What It Means for Households and Businesses

For residents and expats in Portugal, the most immediate consequence will be felt through higher prices. The central bank's inflation projection of 2.8 percent reflects the pass-through of energy costs into everything from fuel and electricity to food and transportation. Inflation is then expected to moderate to 2.3 percent in 2027 and 2.0 percent in 2028 as the energy shock fades.

Despite the weaker growth outlook, the labor market remains resilient. The unemployment rate is projected at 5.9 percent in 2026, stabilizing around 5.8 percent in the following years—historically low levels that should continue to support household incomes even as purchasing power is squeezed by inflation.

Investment, however, remains a bright spot. Gross fixed capital formation is expected to grow 3.8 percent in 2026, outpacing the 3.5 percent recorded in 2025, largely driven by continued execution of Portugal's Recovery and Resilience Plan (PRR) funds.

Medium-Term Outlook and Narrowing Eurozone Gap

Looking beyond 2026, the Bank of Portugal forecasts GDP growth of 1.6 percent in 2027 and 1.8 percent in 2028. While Portugal is still expected to grow faster than the eurozone average—which the European Central Bank revised down to just 0.9 percent for 2026—the gap is narrowing.

The bulletin warns that "risks have intensified since December, in a context of high uncertainty at the global level," with the balance of risks skewed toward lower activity and higher inflation. A prolonged or escalating conflict in the Middle East could trigger further spikes in commodity prices, increased financial market volatility, and disruptions to global supply chains.

Additional risks include rising international trade tensions—notably the US imposition of a 10 percent universal tariff on all trading partners—which could weigh on Portugal's export-dependent manufacturing sector.

Policy Implications and Recovery Path

The central bank's assessment underscores the importance of maintaining fiscal discipline and structural reform momentum. "In this context of geopolitical tension and demographic constraints, it is essential that Portugal maintain the trajectory of reducing public and private debt, continue to strengthen the qualifications of the population, and create the conditions to increase investment and the adoption of new technologies," the bulletin concludes.

The forthcoming PTRR—Portugal Transformação, Recuperação e Resiliência—designed in response to the climate disaster, is flagged as a potential additional stimulus, alongside increased European investment in defense and infrastructure.

For now, the message is clear: 2026 will be a year of adjustment, with households, businesses, and policymakers all navigating a more challenging economic environment shaped by forces largely beyond Portugal's borders.