ECB chief sees new tariff shocks threatening Portugal’s fragile recovery

Portuguese business leaders ended the week with a familiar mix of relief and anxiety. Relief, because the fragile truce on tariffs between Brussels and Washington has removed an immediate threat to key export markets. Anxiety, because European Central Bank president Christine Lagarde is warning that fresh trade flare-ups could still smother demand, blunt investment and keep consumers clutching their wallets well into 2026.

Uncertain calm after the EU-US truce

The ink is barely dry on the EU-US commercial agreement that lifted most steel and aluminium duties, yet Lagarde argues the calm may prove temporary. Speaking in Frankfurt, she sketched a scenario in which any renewed volley of tariffs would collide with a euro that remains stubbornly firm, eroding price competitiveness for Iberian wine, olive oil and machinery. The ECB’s latest baseline puts euro-area growth at 1.2 % in 2025, but the president admitted that projection is built on the “fragile assumption” of no new trade war. If that assumption fails, an already tepid global order book could shrink further before the year is out.

Why Portugal cannot ignore tariff headlines

Portugal ships more than 75 % of its goods to other EU countries and the United States, making it disproportionately sensitive to any disruption at Europe’s external borders. Auto-parts clusters around Palmela, cork factories in Santa Maria da Feira and textile workshops in the Minho valley have all felt the chill of higher input costs and lengthening customs checks since 2024. The Finance Ministry estimates that each additional percentage point of world-wide tariffs shaves roughly €240 M off Portuguese exports within twelve months—a hit equivalent to the annual turnover of an average mid-sized cork group. Lagarde’s message therefore lands directly on the desks of Lisbon’s economic planners, who are already wrestling with a current-account surplus that is evaporating faster than expected.

Dollars, euros and the drumbeat of tariffs

Behind the caution is a numbers game the ECB cannot ignore. In its “mild downturn” scenario, compiled after a string of tariff announcements by Washington this summer, the Bank calculates that euro-area GDP could sink 0.2 percentage points in 2025 and a further 0.2 in 2026. Investment would suffer a sharper initial blow, sliding 1.1 % in the first year of a full trade conflict. Portuguese SMEs—whose equity cushions are thinner than their German or Dutch peers—would be forced to delay modernisation projects and hiring plans, adding yet another drag to the productivity puzzle that still haunts the country a decade after the bailout era ended.

Consumers keep their wallets closed

Trade uncertainty is not just an exporter’s headache. Eurostat data released this week show that household consumption across the monetary union fell 0.2 % in Q1 2025, while the savings rate rose to 15.4 %, well above its pre-pandemic norm. Portuguese families, already squeezed by mortgage repricing and energy bills, are contributing to the trend: retail analysts say demand for big-ticket items such as appliances remains “stuck in standby mode”, and even the tourist-fueled restaurant business saw a modest dip in domestic bookings over the summer. Lagarde called the “disinflationary process largely complete,” with euro-area prices hovering near the 2 % target, but conceded that volatile trade politics could still push costs upward or downward in unpredictable jolts.

Defence budgets and productivity fixes: Lagarde’s prescription

In the same speech, the ECB chief urged governments to channel extra spending into defence, digital infrastructure and R&D, arguing that such outlays would not only fortify Europe in a more hostile world but also lift long-run potential growth. For Portugal, where military investment has lagged NATO targets and broadband roll-outs remain patchy outside cities, this could translate into fresh EU funds and joint procurement schemes arriving as early as next year. Lisbon officials say a share of the money could be steered toward the hydrogen corridor linking Sines, Zaragoza and Marseille, a project viewed in Brussels as a template for strategic autonomy.

China’s electric-car dispute looms large

Beyond the Atlantic sparring, Europe is entangled in a separate fight with Beijing over electric-vehicle subsidies. Provisional EU duties of up to 37.6 % on Chinese battery cars have triggered Chinese counter-measures aimed at pork, brandy and dairy—exports in which Portugal plays a niche but profitable role. Negotiators signalled progress toward a settlement over the summer, yet manufacturers in northern Portugal worry that any relapse could disrupt supply chains feeding German automakers, their biggest clients. At the same time, cheaper redirected Chinese goods—if the US raises tariffs further—could flood European shelves and depress inflation, complicating the ECB’s rate-cut calculus.

What to watch heading into 2026

The ECB’s central path still foresees euro-area expansion re-accelerating to 1 % in 2026 and 1.3 % in 2027, on the assumption that geopolitical fires stay contained and that household confidence gradually improves. But Lagarde’s warning underlines how fragile that trajectory is. For Portugal, the takeaway is clear: diversifying export destinations, vaulting up the value chain and cushioning the domestic market are no longer optional strategies—they are the insurance policy against a world where tariff threats can resurface overnight.

The governor of Banco de Portugal, Mário Centeno, summed it up privately after Lagarde’s remarks: “We have learned to live with uncertainty, but that does not mean we should ignore it.” For businesses from Aveiro to Algarve, the coming quarters will test just how well that lesson has been absorbed.