Portugal's 2026 Budget Assumptions Are Already Obsolete, ECB Data Shows, as Twin Crises Push the Country Toward Deficit

The macroeconomic assumptions underpinning Portugal's 2026 state budget are no longer fit for purpose. New projections from the European Central Bank, published last week, show that key variables — from oil prices to interest rates — have moved decisively against the scenario that Finance Minister Joaquim Miranda Sarmento built his budget around.

The divergence is not marginal. It raises the real possibility that Portugal's much-celebrated return to fiscal surplus is already over, barely a year after it began.

Oil Prices: 24 Percent Above Budget Assumptions

The 2026 state budget assumed an average Brent crude price of 65.40 dollars per barrel for the year. The ECB's updated March projections now place the average at 81.30 dollars — more than 15 dollars higher, a gap of roughly 24 percent.

Even that figure may prove conservative. Since the escalation of the US-Israel conflict with Iran and its spillover into the wider Persian Gulf region, Brent has traded well above ECB assumptions. As of last Friday, the benchmark was trading near 110 dollars per barrel, having briefly touched 119 dollars the day before. The year-to-date average through 20 March already stands at 75 dollars, nine above the government's projection.

Before the conflict erupted at the end of February, the daily average for the year was around 67 dollars — still within budget parameters. Since then, the average has jumped to 96 dollars, an increase of 43 percent.

Interest Rates Moving the Wrong Way

The budget assumed an average three-month Euribor rate of 2.0 percent for 2026. The ECB now projects 2.3 percent, and with energy-driven inflation complicating the rate outlook, ECB President Christine Lagarde has signalled a more hawkish stance. Most market analysts now expect the next move to be a rate increase rather than a cut — a reversal from the consensus as recently as January.

For Portuguese households, the impact is direct. A mortgage of 150,000 euros over 30 years indexed to the short-term Euribor could see monthly interest payments rise from around 70 to 90 euros — an additional 20 euros per month on a conservative estimate, though the real figure depends on individual contract terms.

GDP Growth: Well Below Target

The government inscribed a growth rate of 2.3 percent in the 2026 budget, a figure the Bank of Portugal endorsed as recently as December. That target now looks unrealistic.

Paula Carvalho, chief economist at BPI Research, calculates that a 20-dollar increase in the average oil price — pushing Brent to about 87 dollars — would subtract 0.14 percentage points from GDP growth. Given the magnitude and duration of the shock so far, she estimates Portuguese economic growth could come in closer to 1.8 percent.

That analysis was made before the Bank of Portugal governor confirmed on Monday that economic activity actually contracted in the first quarter, partly as a result of Storm Kristin. With the storm damage and the energy shock operating in tandem, even 1.8 percent may prove optimistic.

Sectoral Impact: Industry Hit Hardest, Tourism a Potential Offset

According to BPI's analysis, the effects of higher energy costs will not be felt evenly. Industry, which is more energy-intensive, faces the steepest headwinds. Tourism, by contrast, could benefit from Portugal's reputation as a safe destination, potentially offsetting some of the demand destruction caused by higher costs.

On inflation, BPI expects the government's projection of 2.1 percent to fall short of reality, with the rate more likely to settle around 2.7 percent — driven largely by fuel costs and their knock-on effects across the economy.

The Deficit Question

Prime Minister Luís Montenegro acknowledged last week that Portugal may return to a budget deficit in 2026, citing “exceptional circumstances” created by the combination of storm reconstruction and the energy crisis. He stressed, however, that the country's recent track record of growth and fiscal surpluses provides enough room to absorb the shock without destabilising public finances.

“We may, eventually, have a deficit situation and still have balanced public accounts,” Montenegro told journalists after the European Council meeting on 19 March.

Whether Brussels sees it the same way remains to be tested. While the EU's fiscal rules include flexibility for extraordinary events, Portugal had positioned itself as a model of fiscal discipline in recent years. A return to deficit, even if justified, would complicate that narrative.

The Bank of Portugal's full Economic Bulletin, expected on Wednesday, will provide updated official projections and a more complete assessment of how the twin crises are reshaping the country's economic outlook for the remainder of 2026. The deadline pressure on Portugal 2030 EU funds and the country's strong renewable energy position will be key factors in determining how quickly the economy can adapt.