Economic and Fiscal Outlook 2025-2029

Macroeconomic Outlook

These projections are published at a time when the economic environment is heavily influenced by high uncertainty and by risk factors surrounding economic policies and global geopolitics. In addition to geopolitical tensions, uncertainty in trade policy has resurfaced, mainly due to the announcement of protectionist measures by the current US Administration. The impact of the tariff increases announced on April 2, after the closing date for the assumptions underlying this report, is not reflected in this projection.

In this context, the CFP's macroeconomic no-policy-change scenario projects an acceleration of the economic activity in 2025, although less pronounced than projected in last September. The Portuguese economy is expected to grow by 2.2% in 2025 (1.9% in 2024), a downward revision of 0.2 percentage points compared to September. For 2026 and 2027, a slowdown in the growth rate of real Gross Domestic Product (GDP) to 2.0% and 1.6%, respectively, is projected. In the medium term, economic activity is expected to converge to the potential growth rate (1.8%).

The projected acceleration for 2025 is expected to result from an increase in the investment rate, mainly driven by the strengthening of public investment. This reflects the expectation of a higher execution rate of the Recovery and Resilience Plan (RRP) compared to the previous year, which is expected to continue into 2026. In 2027, total investment is expected to contract by 1.7%, mainly reflecting the assumption of a sharp reduction in public investment in real terms (-20%), associated with the end of the RRP. If this occurs, it would mechanically be consistent with a negative contribution to real GDP growth of 0.8 percentage points. This evolution contrasts with the projected private investment, which is expected to continue to show greater dynamism in the context of less restrictive financing conditions and reduced uncertainty.
 

CFP Macroeconomic Scenario (change, %)

Sources: CFP own projections (2025-2029) and Statistics Portugal (2024).

Regarding prices, the CFP projects a gradual reduction in the inflation rate. This is measured by the rate of change in the Harmonized Index of Consumer Prices (HICP), which is projected to decrease to 2.3% in 2025, after 2.7% in 2024, gradually converging to 2.0% in the medium term. In 2025, the growth rate of the GDP deflator is also expected to slow down, decreasing by 1.8 percentage points to 2.6%. The overall deflators of the components of domestic demand are expected to contribute to this slowdown, and there is also a slight deterioration in the terms of trade.

The labor market is expected to remain robust, despite the slowdown in job creation, limited by demographic trends. Employment is projected to grow by 1.0% in 2025 (1.6% in 2024), converging to a zero value at the end of the projection horizon, in line with the demographic projections incorporated into the technical assumptions of the exercise. Over the projection horizon, the unemployment rate is expected to maintain a downward trend, decreasing from 6.5% of the active population in 2025 to 6.0% in the medium term.

Fiscal Outlook

The CFP has revised down the medium-term fiscal scenario compared to September. This results from incorporating the fiscal impact of economic policy measures that increase public expenditure and reduce revenue, aimed at improving the income of households, young people, pensioners, and businesses, which were approved in the 2025 State Budget and by additional legislation approved until the end of the XVI legislature, covering salary increases for various professional groups in the public sector.

For 2025, a balanced budget is projected. However, this projection is sensitive to factors such as the execution rate of public investment, of RRP loans, and the evolution of direct taxes, particularly PIT (due to the lower expected volume of refunds, which is a one-off effect), and the use of budgetary containment mechanisms, so a slight budget surplus cannot be ruled out.
From 2026 onwards, a return to budget deficits is projected, assuming the maintenance of current policies. For 2026, a deficit of 1% of GDP is projected, of which more than half is explained by the impact of RRP loans (0.6% of GDP). For the following years until 2029, the budget deficit is expected to stabilize around 0.6% of GDP. The primary balance, which excludes interest charges, although lower than projected in September 2024, is expected to remain in surplus throughout this period, contributing to a sustained reduction of the public debt ratio.

The net expenditure indicator will grow above the commitment assumed by the Portuguese State. The new european framework focuses on the evolution of the "net expenditure" indicator. Between 2025 and 2028, an average growth rate of 4.4% is projected for this indicator, which is above the commitment assumed by the Portuguese State in the MTP endorsed by the Council of the European Union (3.6%). Results for 2024 are provisional as discretionary revenue measures are still to be updated. According to the projection, from 2025 (inclusive), the accumulated balance in the control account exceeds the maximum allowed threshold, which could lead to the preparation of a report by the European Commission, under Article 126(3) of the TFEU in May 2027, if the 2026 execution confirms the projected budget deficit situation (1% of GDP).

CFP Fiscal Scenario (% of GDP)

Sources: CFP own projections (2025-2029) and Statistics Portugal (2024).

For 2029, the CFP projects a reduction in the public debt ratio by 9.5 percentage points of GDP compared to 2024, reaching 85.4% of GDP at the end of the horizon. This development is expected to be driven by primary surpluses and, to a lesser extent, by a favorable, albeit decreasing, dynamic effect resulting from the falling contribution of the price effect. A sensitivity analysis, considering a 50 basis point increase in the costs of new financing each year of the period under assessment, indicates a marginal impact of 0.4 percentage points of GDP on the public debt ratio by the end of the projection horizon. This moderate effect is due to the relatively long maturity of the public debt stock.

Risks and factors not considered in the no-policy-change projection

The risks affecting the macroeconomic projection exercise are predominantly downward in the short term, in the case of economic growth, particularly in its external dimension. These include, negatively, the resurgence of protectionism and the increase in customs barriers; the persistence of multiple active armed conflicts; volatility in financial markets and the possibility of interest rates remaining high for a longer period; and the occurrence of extreme weather events, with an increased frequency. On the domestic side, the possibility of public investment growing at a slower pace than expected, as well as additional delays in the financial implementation of the RRP, stands out. This risk is particularly significant in a macroeconomic scenario highly dependent on a positive impulse of public investment for economic activity. On the positive side, in a context of a sustained decline in inflation and historically high savings rates, domestic demand may surprise. At the same time, and in line with the recent past, employment growth may be higher than anticipated. Finally, the increasing pressure on EU Member States, particularly those belonging to NATO, to increase defense spending, may lead to a greater dynamism in this sector, constituting an upward risk for economic growth.

In addition to the identified risks related to the macroeconomic scenario, the fiscal trajectory may be influenced by factors not considered in the projection. These include, namely: (i) a possible underestimation of the Solidarity Supplement for the Elderly (CSI) beyond 2025; (ii) a higher financial contribution from Portugal to the European Union budget and possible future support to Ukraine; (iii) the materialization of contingent liabilities, in addition to the risk arising from extreme weather events exacerbated by climate change, as well as other natural risks (e.g., seismic risk). Benefiting the projected fiscal trajectory are the possibilities of: (i) higher elasticity of tax revenue relative to the macroeconomic bases; (ii) more robust growth in social contributions; (iii) higher dividends from financial participations; (iv) lower execution of public investment supported by national financing or the RRP loan component; and (v) lower interest charges, if public debt follows a more favorable trajectory or market interest rates turn out to be lower than assumed.

This projection also  reflects quantifications based on CFP's own calculations concerning the amounts related to salary increases for specific professional groups in the public sector and the amount of IRS refunds to occur in 2025. The impact on public accounts of the development of large public works has not been incorporated into the projection, as these amounts are not yet known. Finally, the projection maintains the current ratio of defense expenditure to GDP (1.5%), simulating a linear convergence towards the commitment of 2% of GDP in 2029 in Box 7 of the report.

Date of last update: 10/04/2025