I have been reading the weekly magazine The Economist for many years, and it is rare for Portugal to be mentioned. When it does appear, it is typically for bad reasons, a crisis, a government resignation, a scandal. In recent years, the situation has changed. A year ago, Portugal was identified as the country that had made the greatest progress worldwide in terms of attractiveness to young, highly qualified talent, in an article that began as follows: “There is a lot to like about Portugal.” This week, The Economist still maintained some suspense at the beginning of the article regarding the Economy of the Year for 2025, but the title of the ranking chart said it all: “Sweet as a Pastel de Nata.” Portugal was indeed considered the best economy of the year, among 36 advanced economies, based on a set of indicators measuring price stability, GDP growth, employment growth, and stock market performance. The value of this recognition for our country’s international reputation is significant, with very positive coverage in the international press. Portugal deserves congratulations, and so do the Portuguese people.
However, in Portugal, instead of a natural reaction of joy and pride, a chorus of critical voices quickly emerged, pointing to all kinds of weaknesses in the Portuguese economy. Some argue that ordinary Portuguese people do not feel these improvements; others claim that Portugal is only about tourism, that growth is concentrated in Lisbon, that productivity has not increased, that it is all due to European funds, that it resulted from uncontrolled immigration, that poverty and job insecurity have increased, that the housing crisis is a disaster, and so on, and so forth. I would like to analyze these arguments, indicating which have some validity and which are merely the result of a desire to disparage or, worse, to manipulate public opinion. Since 2025 is not yet complete, I analyze data from 2023 to 2025, a period already free of COVID effects.
First, the argument that most Portuguese people do not feel these improvements in their daily lives does not hold up against the evidence. Unemployment in Portugal at 5.8% is close to the structural level of full employment, meaning that those who want to work can find a job. Wages, although still low, have increased significantly in real terms, both through increases in the minimum wage and in the average wage. In fact, real household income has been growing at a rate of around 5% per year. This has led to several positive effects, such as an increase in the household savings rate from 7.3% of income in 2022 to 12.5% in 2024, one of the largest increases in the Eurozone. In addition, household debt levels have been declining, and nonperforming loans are at historically low levels. Yes, Portuguese people, in general, are better off, and inequality is not increasing. For example, the percentage of Portuguese people at risk of poverty or social exclusion has fallen in recent years and is now below 20%, a figure lower than the European Union average. The strong increase in the minimum wage during this period, the situation of full employment, and public and private social support help explain this positive outcome.
Second, the argument that these figures mean nothing in the face of the severe housing crisis deserves to be analyzed from a different perspective. It is true that since 2015 housing prices have more than doubled, and the rental market has become out of reach for Portuguese people in the main cities. But we should not forget that 73.4% of households live in owner occupied housing. In other words, the main asset of nearly three quarters of Portuguese people has doubled in value in less than a decade. Rising housing prices therefore benefit most Portuguese people, although they negatively affect a minority, particularly young people or those who want to expand their families and need larger housing. This suggests that policies to support access to housing can and should be developed, as well as incentives for the construction of new housing. A home that is worth more is a home worth renovating and placing on the rental market, incentives that have led to significant renovation and optimization of the real estate stock. And a luxury home that is built and sold to a foreigner is an export of such value that the international buyer often relocates to Portugal to enjoy the product and ends up paying a lifetime annuity to the state through property taxes. Most Portuguese people are therefore wealthier due to housing appreciation, and municipalities have higher revenues.
As for the argument that the growth of the Portuguese economy is essentially related to tourism, this claim is only valid for the year 2023. In that year, when the Portuguese economy grew by 3.1%, tourism experienced a very large jump, with an 11% increase in overnight stays, probably accounting for more than 1% of that GDP growth. This was also evident in regional economic growth, which was much higher in Lisbon, the Algarve, and Madeira, regions that are quintessentially tourist oriented, than in the rest of the country. However, in 2024 and 2025, it is no longer true that tourism is the engine of the Portuguese economy, and regional economic growth has become more balanced across the different regions of the country.
Finally, the evidence is mixed regarding the criticism that this growth is achieved through employment growth and that productivity, defined as wealth generated per worker, is not increasing. In 2023 and 2024, productivity grew by nearly 1% per year, and Portugal also made a real convergence leap in GDP per capita relative to the European Union, from 79% to 82%. Preliminary data for 2025, however, indicate a decline in productivity of more than 1%, meaning that employment is growing faster than GDP. Nevertheless, these data are not final, and GDP figures are sometimes revised upward. Productivity growth is achieved by working better through improved processes and skills, by increasing capital intensity through greater public and private investment, or by serving more demanding markets through exports or wealthier customers. Portugal has conditions in all three areas to improve productivity in the coming years.
The final criticism is that the stronger growth of Portuguese GDP is related to the stimulus provided to the economy by European funds, particularly the Recovery and Resilience Plan, since other programs have existed at a similar scale since 1986. Data from 2023 and 2024 do not appear to indicate a strong contribution from the Recovery and Resilience Plan to economic growth. Data for 2025, however, point to a stronger effect of the plan of around 1 percentage point of GDP. Given that the plan will end in June 2026, the coming year will be crucial to understanding the true growth potential of the Portuguese economy, which will require higher investment and productivity to break through the 3% barrier.
A final note to say that although The Economist ranking included four relevant indicators, it left out one in which Portugal performs in an unusual way, the balance of public accounts, where Portugal is one of the few countries in the world with balanced budgets over the past three years and is on the global podium for debt reduction. It also left out another relevant indicator, the current account balance, which measures economic sustainability and in which Portugal has a positive record. Portugal deserves this top position.
It is worth recalling that less than 15 years ago Portugal was on the verge of bankruptcy and was forced into a very painful economic adjustment that generated high unemployment and the destruction of many companies. Through the effort of all, we now have a radically different and positive situation across several important dimensions. There is still much work to be done, particularly in accelerating investment and increasing productivity. But we are on the right path, a path toward greater prosperity. Let us acknowledge this and raise a toast to Portugal with a glass of Port wine accompanied by a sweet pastel de nata.
Filipe Santos, Dean of CATÓLICA-LISBON