The Bank of Portugal on Monday confirmed its forecast that the economy will expand by 1.8% in 2026, leaving that projection unchanged from its March guidance while altering its fiscal and inflation projections in response to higher oil prices linked to the conflict in the Middle East.
In its quarterly economic bulletin the central bank revised down its projection for the 2026 budget deficit to 0.2% of gross domestic product, an improvement from the 0.4% shortfall it had forecast in December. That follows a relatively rare outcome in the euro zone: Portugal posted a budget surplus equal to 0.7% of GDP in 2025.
Looking further ahead, the Bank of Portugal expects the budget balance to deteriorate to a deficit of 0.5% of GDP in 2027 and to remain at that level in 2028.
The bulletin stressed a restrained growth backdrop, saying that "growth prospects are constrained by higher oil prices, elevated uncertainty, tighter financial conditions and weaker external demand." The central bank also updated its GDP profile around last year’s expansion - GDP grew 1.9% in 2025 - and now forecasts growth of 1.6% in 2027 and 1.8% in 2028.
Economic activity showed no quarter-on-quarter growth in the first quarter of this year, after a 0.9% expansion in the previous quarter. The central bank attributed the first-quarter stagnation to severe storms and floods in January and February and to the adverse effects of the war in Iran, which pushed up energy prices.
The government retains a more optimistic near-term view, projecting 2% growth for the year and a balanced budget.
On price developments, the Bank of Portugal raised its forecast for EU-harmonised inflation this year to 3.1%, up from its March projection of 2.8%, following an inflation rate of 2.2% in 2025. Inflation is expected to moderate to 2.4% in 2027 and to 2.0% in 2028 under the bank’s central scenario.
The bulletin also set out a path for public debt. The Bank of Portugal projects government debt will decline to 85.7% of GDP this year from 89.7% in 2025, and to fall further to 82.5% in 2027 and 79.5% in 2028.
Summary
The central bank maintained its 2026 growth forecast at 1.8% while reducing its projected budget deficit for that year and raising the near-term inflation outlook. The bank cited higher oil prices tied to Middle East tensions, weather-related disruptions, tighter financial conditions and weaker external demand as headwinds to growth.
Implications
- Fiscal metrics appear to be improving in the near term, with a reduced deficit forecast for 2026 and a path of declining public debt through 2028.
- Energy-price pressures have influenced both the inflation outlook and recent GDP dynamics.
- Economic activity lost momentum in Q1, affected by extreme weather and higher energy costs linked to the conflict in Iran.