At the end of 2025, Portugal was named Economy of the Year by The Economist. This unusual recognition resulted from an estimated GDP growth of 2%, above the EU average, consistent employment growth, price stability, and a strong appreciation of the stock market. These positive results did not emerge in isolation but rather follow a period of excellent economic performance since 2023, with cumulative real growth of 7.5% over three years, increases in employment and productivity, unemployment at a historic low of 5.8%, rising household savings, budget surpluses, a current account surplus, and real convergence from 79% to around 83% of the EU average income level. Will Portugal be able to consolidate this solid performance in 2026 and continue converging toward the European average?
There are several risk factors for the Portuguese economy in 2026. On the one hand, weakness among some of Portugal’s largest trading partners, such as Germany and France, could reduce exports. On the other hand, the Recovery and Resilience Plan (PRR) will see its final acceleration in the first half of the year and then come to an abrupt end on June 30, which could lead to a contraction in public investment and employment in the second half. In addition, tighter immigration controls in Portugal may reduce employment growth, which has been a key driver of the economy. Finally, uncertainty generated by the Trump administration and rising tariffs could lead to slower global economic growth, with repercussions for Portugal as well. There is also the risk of a crash in U.S. financial markets, which show speculative-level indicators in some asset classes, namely technology stocks, crypto assets, and private credit and capital markets. Globally, the outlook is not encouraging.
Although these risks are real, even if they materialize, their impact on the Portuguese economy should be limited, as there are several factors supporting growth.
First and foremost, increased investment should be highlighted. One of the weaknesses of the Portuguese economy in recent years has been low investment, but an acceleration of public investment is evident in 2025 and should continue in 2026 even without PRR funds after July, due to public finance surpluses. Moreover, large-scale investments already announced take time to be licensed and launched. As a result, 2026 should be a strong year for the execution of both private and public investment.
With regard to immigration, despite the possibility of some reduction in labor supply due to tighter immigration restrictions, immigration is likely to remain strong given Portugal’s attractiveness to talent from around the world, including from EU countries, for which there is full freedom of movement and which already account for 25% of immigration. As such, employment is likely to continue to grow in 2026, with a higher average level of qualifications. The Portuguese economy will continue to benefit from the massive investment in skills over the past 20 years, as the population leaving the labor market due to retirement is less qualified than the young and immigrant population entering it, improving average qualifications and supporting productivity growth.
On the consumption side, income tax cuts, the significant increase in the minimum wage, and the growing settlement in Portugal of affluent individuals from around the world should continue to boost households’ real income and lead to higher private consumption, particularly in services, which generate higher value added for Portugal.
Portugal’s favorable energy mix, with high levels of hydroelectric, wind, and solar power generation, means that the country produces almost all of its electricity from renewable sources and is increasingly less dependent on fossil fuels, also due to the growing electrification of the vehicle fleet, with electric and plug-in hybrid cars accounting for more than 50% of new registrations. The resulting reduction in oil imports is another gain for the economy. At the same time, the lower energy costs of the Iberian Peninsula compared with other European countries could attract new industrial and digital investments to Portugal.
Finally, the greater the level of global geopolitical uncertainty, the greater Portugal’s advantage. Its location in the safest region of Europe and its attractiveness as a place to start businesses and to live not only attract people but also economic activity, particularly from European multinationals seeking to grow or reconfigure their value chains. Indeed, the growth of development and competence centers of multinational companies in Portugal has been one of the drivers of economic growth.
Lastly, the risk of a global financial crisis triggered by a potential downturn in U.S. markets and a possible reduction in liquidity would, at first glance, have little impact on Portugal. The Portuguese banking system is very solid and only marginally dependent on global markets. Nonperforming loans to households and firms are at a historic low. The government, due to public finance surpluses, has limited financing needs. And the areas of greatest speculation (AI-related assets and crypto assets) still have little presence in Portugal. The Portuguese stock market, despite rising by more than 30% in one year, still shows prudent valuations relative to expected future earnings.
I am convinced that the areas of strength and opportunity in the Portuguese economy outweigh the risks and weaknesses. Portugal should therefore continue to post solid growth in 2026. I am also convinced that the final figures for the economy in 2025 will surprise on the upside, particularly in terms of GDP growth and the public accounts surplus. Portugal will have a unique opportunity in the coming years to make a leap in investment and productivity that will turn it into a more prosperous economy, converging toward the European average.
Happy New Year to all!
Filipe Santos, Dean of Católica-Lisbon SBE