Portugal's Economy Expected to Shrink in Q1 as Forum for Competitiveness Warns of Mounting Headwinds

Portugal's economy is expected to have contracted on a quarter-on-quarter basis in the first three months of 2026, according to the latest assessment from the Forum for Competitiveness (Fórum para a Competitividade), one of Portugal's most influential independent economic think tanks.

The Forum's quarterly business outlook report, published on Tuesday and reported by Lusa, warns that the economy's performance in the coming quarters remains "very dependent on the evolution of the conflict in the Middle East" — a reference to the ongoing tensions that have disrupted global energy markets, shipping routes, and investor confidence since late 2025.

What the numbers show

While full national accounts data for Q1 2026 has not yet been released by the National Statistics Institute (INE), the Forum's proprietary model — based on business surveys, industrial output, and trade data — points to a negative quarter-on-quarter growth rate for January through March. This would mark the first quarterly contraction since the pandemic-era disruptions of 2020, although the Forum emphasises that the decline is expected to be modest.

On a year-on-year basis, GDP is still expected to show positive growth, buoyed by favourable base effects and continued strength in tourism. However, the sequential decline signals that momentum is fading — particularly in the industrial and export sectors most exposed to global trade disruption and rising input costs.

Full-year outlook: 1.5% to 1.9%

For the full year, the Forum for Competitiveness estimates GDP growth of between 1.5% and 1.9% — a range that sits below the government's official projection of 2.2% and the OECD's most recent forecast of the same figure. The think tank's more cautious view reflects what it describes as a "curious ambivalence" in the international outlook: economic growth forecasts have been revised upward, yet so have geopolitical risks.

Among the factors the Forum highlights are the ongoing war in the Middle East, which has kept Brent crude above $100 per barrel for much of 2026; the US tariff escalation, with a 20% levy on EU goods taking effect on April 9; and uncertainty around European Central Bank rate decisions in the second half of the year.

Government responds with EUR 600 million business support

The economic headwinds come as Prime Minister Luís Montenegro marked two years in office last week with a speech at the official residence in Lisbon, during which he acknowledged the growing pressure on Portuguese businesses. Montenegro announced a new EUR 600 million support instrument to help companies cope with rising energy costs — on top of the EUR 10 billion package rolled out in 2025 to cushion the impact of US tariffs.

"The country is doing better, as are the Portuguese people," Montenegro said on April 2, while conceding that the government was prepared to "sacrifice budget results" if necessary to protect the economy from external shocks.

A tightrope between growth and fiscal discipline

Portugal's budgetary position remains relatively strong by European standards — the country ran a fiscal surplus last year and sovereign debt has been steadily declining as a share of GDP. But the combination of rising bond yields (last week's 10-year auction was the most expensive in 12 years), the cost of Storm Kristin reconstruction, and now the prospect of a GDP slowdown is narrowing the government's room for manoeuvre.

The Forum's report underscores a broader concern among economists: that Portugal's recent growth outperformance compared with the eurozone average may be running out of steam, just as the global environment turns more hostile. With US tariffs biting, energy costs elevated, and the Middle East conflict showing no signs of resolution, the second quarter could prove equally challenging.

INE is expected to release its flash estimate for Q1 GDP in mid-May.