Portuguese Economy Faces Q1 Headwinds as Storms and Middle East Conflict Cloud Near-Term Outlook

After ending 2025 on a high — GDP growth hit 0.9% in the final quarter, a strong result by any European standard — Portugal's economy is entering a more turbulent first quarter, according to the latest CIP/ISEG economic barometer published this week. A convergence of weather damage, sector-level moderation, and rising geopolitical risk from the Iran conflict is expected to weigh on near-term performance even as the country's underlying fundamentals remain solid.

The Confederação Empresarial de Portugal (CIP) and the ISEG business school, which co-produce the monthly barometer, are forecasting a slowdown in chain GDP growth for the first quarter of 2026, though they stop short of projecting a contraction. For the full year, the CIP/ISEG range stands at between 1.8% and 2.2% growth — respectable by European standards, but a step down from the pace that characterised much of 2025.

Storms Leave a Mark

The most immediate drag on the economy comes from the series of extreme weather events that swept across Portugal in January and February. Storm Kristin in January — which led to the resignation of Interior Minister Maria Lúcia Amaral following criticism of the government's response — caused widespread disruption to industrial activity and agricultural production. The CIP barometer notes that the interruption of activity in a "significant number" of industries and farm holdings is already visible in the data for January, the most recent month for which detailed figures are available.

Rafael Alves Rocha, the CIP's director-general, acknowledged the strain while also flagging offsetting forces. "The very positive evolution of the labour market and the execution of PRR funds should continue to sustain domestic demand in this quarter," he said, referring to Portugal's allocation from the European Union's post-pandemic Recovery and Resilience Facility, which remains one of the main engines of public investment.

Mixed Signals in the January Data

The January indicators themselves present a mixed picture. On the positive side, sales of passenger cars rose 16.1% year-on-year — a signal of consumer confidence — while light commercial vehicle sales were up 5.6% and electricity consumption recorded a 5.9% increase, suggesting activity in manufacturing and services. On the other hand, passenger car production fell sharply, declining 10.9% compared to January 2025, a reminder that Portugal's automotive export sector remains exposed to global demand cycles.

The Iran Variable

Beyond the domestic weather effects, the barometer devotes considerable attention to the risks posed by the widening conflict in the Middle East. The US-led campaign against Iran — for which Portugal controversially allowed the use of Lajes Air Base — has already pushed energy prices higher and is driving up global shipping costs, particularly in maritime freight. The CIP warns explicitly of risks from a "prolonged spike" in oil and natural gas prices, which would filter through to Portuguese businesses as higher energy and transport costs.

The concern is not abstract. Portugal remains a net energy importer, and its trade-exposed sectors — from tourism and hospitality to automotive components — are sensitive to fuel costs and logistics disruption. Any sustained elevation in oil prices above current levels would complicate the government's fiscal projections, which already forecast a modest deficit of around 0.3% of GDP in 2026, according to European Commission estimates.

Resilience in the Foundations

The overall picture is of an economy navigating a difficult period without losing its structural momentum. Employment remains strong, real wages are rising, and EU-funded investment continues to flow into infrastructure and the green transition. The PRR pipeline, if executed on schedule, could offset much of the private sector drag in the months ahead.

For businesses and households, the key uncertainty is how long the Middle East crisis persists and whether oil prices stabilise or continue to climb. The CIP barometer, in its current form, assumes a degree of de-escalation; a prolonged conflict would necessitate a downward revision to growth forecasts. That is a scenario Portuguese economic managers are watching closely — and hoping to avoid.