Household Spending and EU Funds Fuel Portugal’s Growth Amid Export Slowdown

Portugal’s economy heads toward the end of the year on a cautiously upbeat note. Fresh figures from Brussels confirm that domestic demand is doing the heavy lifting, even as exports and foreign tourism cool. Yet Lisbon’s own projections remain rosier than those of the European Commission, setting up an intriguing gap between political optimism and technocratic prudence.

In brief

Behind the headlines, three threads dominate the outlook: private consumption is accelerating, European recovery funds are propelling investment, and global headwinds are clipping export momentum. The way these strands interact will determine whether growth lands closer to the government’s 2 % target or the Commission’s slightly lower 1.9 % estimate.

What keeps the engine humming

Household wallets look noticeably thicker this autumn. The one-off pension bonus, paid in September, and the revised income-tax withholding tables that took effect in August, left many workers and retirees with unexpected breathing room. According to Eurostat data processed by the Commission, the extra cash translated into a sizable jump in retail sales, cafés and cultural spending. The National Statistics Institute corroborates the trend: the third quarter delivered a 0.8 % quarter-on-quarter GDP rise, the best in a year.

Crucially, the labour market is still tight. Brussels sees unemployment drifting down to 6.3 % next year, a level Portugal last enjoyed before the sovereign-debt crisis. Pair that with moderating loan rates—banks are now renegotiating mortgages at spreads last seen in 2021—and the recipe for further consumption gains is clear.

Investment steps into the spotlight

While households drive today’s momentum, tomorrow’s belongs to the Recovery and Resilience Plan (PRR). Roughly €9.7 billion had reached companies, councils and public agencies by early November, about 44 % of the total envelope. The Commission calculates that the PRR alone will add more than 1 percentage point to GDP between 2024 and 2026, with the peak spill-over expected in 2026 when large-ticket infrastructure and green-tech projects break ground. Finance Ministry officials privately concede that without this lifeline, capital formation would sag.

Private investors are also crowding in. A new Innovation & Competitiveness fund, capitalised at €315 million and administered by Banco Português de Fomento, has already approved dozens of applications in artificial intelligence and re-industrialisation. Economists at the University of Porto say these instruments could cushion any post-PRR falloff, though the Council of Public Finances warns of a possible investment dip once Brussels money tapers.

External brakes appear

Global turbulence is leaving its mark on Portugal’s tradable sectors. Export growth slowed sharply this year, with the Commission noting a weaker US market and softer demand from Germany. Customs data for the first nine months show the merchandise trade deficit widening by €4.1 billion, despite respectable gains within the EU.

Tourism tells a similar story. International arrivals remain high in absolute terms—WTTC still expects nearly 33 million visitors in 2025—but the growth rate is ebbing. Foreign guests accounted for 67.8 % of overnight stays in the third quarter, the lowest share since 2022. Domestic travellers, on the other hand, are filling hotel rooms at a record clip, partly offsetting the lull from abroad.

Fiscal outlook: the optimism gap

Here the divergence between Lisbon and Brussels becomes pronounced. The government pencilled in a 0.3 % of GDP surplus for 2025 and a smaller 0.1 % surplus for 2026. The Commission counters with a balanced budget next year and a 0.3 % deficit the following year, citing more conservative assumptions about current spending. Both, however, agree that public debt will keep falling, dipping below 90 % of GDP by 2027 if growth holds.

Inflation is a shared concern but not an immediate threat. Brussels expects the headline rate to settle at 2.2 % in 2025 and exactly 2 % thereafter, comfortably inside the European Central Bank’s target band. The projection underpins the hope that purchasing-power gains will persist without reigniting price pressures.

Why this matters for residents and businesses

For Portuguese households, the message is straightforward: net incomes should rise, helped by lower withholding, pension top-ups and solid wage growth. Large mortgage holders may finally feel relief as Euribor-linked rates ease.

Entrepreneurs can count on a two-year window of generous EU financing and still-solid domestic demand, but they must brace for tougher export markets and the possibility of a tourist plateau. The banking system, strengthened by higher-than-expected profits in 2024, shows no sign of withdrawing credit, though regulators flag the usual risks in consumer loans.

Looking beyond 2026

Brussels pencils in 2.1 % growth for 2027, roughly in line with Portugal’s long-term potential. Yet most analysts believe that sustaining anything above 2 % will require fresh productivity gains, quicker justice procedures and smoother planning approvals—structural issues the PRR only partially addresses. If policymakers can convert one-off recovery funds into lasting competitiveness, the current expansion could extend well into the decade. Otherwise, the domestic-demand engine may run short of fuel once the EU cheques stop arriving.

Either way, the coming months will reveal whether Portugal can turn a moment of relative calm into a springboard for durable prosperity—or whether external squalls will once again test the country’s hard-won economic resilience.