The Bank of Portugal Lifts Its Growth Forecast to 2.3 Percent, but Sees Inflation Peaking Near 3.6 Percent at the End of the Year

The Banco de Portugal (Bank of Portugal) now expects the Portuguese economy to grow by 2.3 percent this year, half a percentage point more than it forecast in June, and has also raised its projection for 2027 from 1.6 to 1.8 percent. Inflation, however, is still climbing: the central bank expects it to peak at about 3.6 percent in the last three months of 2026, driven by petrol and diesel.

The figures come from the October Boletim Económico (Economic Bulletin), published on Wednesday, days before the government presents its 2027 budget to parliament. The projections use data up to 30 September.

Why growth was revised up

Most of the upgrade comes from new national accounts data showing a stronger spring than the bank expected. Gross domestic product grew 0.9 percent in the second quarter on the previous three months, against the 0.4 percent the bank had pencilled in, with household spending and exports doing the work.

That late push rests on money landing in people's pockets. The bulletin names two measures announced by the Council of Ministers on 17 September, the extraordinary pension supplement and the cut in IRS (personal income tax), as reasons to expect "greater dynamism" in private consumption in late 2026 and early 2027. Public investment is forecast to jump 24.3 percent this year as Recovery and Resilience Plan (PRR) projects are rushed to completion, then fall by about 14 percent in 2027 once that money stops.

Prices and household income

Annual inflation, measured by the harmonised index, is projected at 3.1 percent for 2026, 2.4 percent for 2027 and 2.0 percent for 2028, the same path the bank drew in June. It rose from 2.2 percent in the first quarter to 3.4 percent in the third. Inflation excluding energy and food is projected at 2.5 percent this year and 2.6 percent next.

Households still feel it. Real disposable income is expected to grow 2.0 percent this year, down from 3.1 percent in 2025, partly because of the "unanticipated rise in prices". Families are spending more than their income growth would suggest, so the savings rate is projected to fall by 0.9 points to 11.4 percent. The bank's preliminary estimates find similar real income growth across income groups, but it warns that higher prices have hit households with little financial margin hardest and says "temporary measures targeted at the most vulnerable families appear desirable".

Jobs and migration

Unemployment is projected to stay at 5.6 percent from 2026 to 2028, down from 6.0 percent in 2025. Employment growth slows sharply, from 1.7 percent this year to 0.7 percent in 2027 and 0.3 percent in 2028, "in a context of migration flows lower than those observed in 2021 to 2024". The bank notes that immigration has been a major source of new workers, a contribution the official employment series do not yet fully capture because they still rest on the old population estimates. Those series are due to be revised in March 2027.

A trade deficit returns

Imports are forecast to grow 6 percent this year, well ahead of exports at 3.5 percent, turning a goods and services surplus of 1.0 percent of GDP in 2025 into a deficit of 0.4 percent in 2026. Net EU transfers reach 2.6 percent of GDP this year, the highest since 1996 to 1997, before falling as the PRR ends.

The bank sees risks tilted towards weaker growth and higher inflation, mainly from the Middle East: a longer or wider conflict "could generate new increases in energy prices". Its growth figure for 2026 is slightly above the 2.2 percent projected by the Public Finance Council last month, and it comes as consumer confidence has fallen for a second month.