Portugal’s 2026 Growth to Raise Wages, Slash Taxes; 2027 Slows

Portugal’s economy is expected to keep expanding over the next two years, but the pace won’t be linear. Fresh projections from the Organisation for Economic Co-operation and Development (OECD) point to a vigorous 2.2 % advance in 2026 followed by a cooler 1.8 % in 2027. Behind those figures lies a tug-of-war between generous public stimulus, still-resilient household spending and an inevitable winding-down of European recovery funds.

Snapshot: what to watch

• 2.2 % growth in 2026 – the fastest since 2023, driven by household consumption and a last surge of EU cash.

• 1.8 % in 2027 – momentum eases as the Plano de Recuperação e Resiliência (PRR) closes and fiscal policy tightens.

• Income boost – higher minimum wage (€920) and lower IRS rates cushion families next year.

• Tourism & tech remain bright spots; export growth moderates on weaker global demand.

• Dueling forecasts – Bank of Portugal, CFP, NECEP and the government differ on how sharp the 2027 slowdown will be.

OECD numbers in European context

The Paris-based institution believes Portugal can outperform the euro-area average again in 2026 thanks to “robust employment, rising real wages and delayed EU funds.” Even with the projected deceleration in 2027, the country would still be expanding faster than Germany, France or Italy, according to the same dataset. The OECD also flags the unusual fact that Portugal is on track for a modest budget surplus while growing above 2 %, something rare among its southern European peers.

Why 2026 looks unusually strong

Several domestic engines fire at once next year:

• Private consumption: a higher minimum wage, a fresh round of IRS bracket updates and a one-off pension top-up leave more cash in pockets.• Public investment: nearly 3 % of GDP in PRR disbursements finally land on worksites, from green hydrogen plants in Sines to school digitalisation programs in the interior.• Labour market: unemployment hovers near record lows, keeping wage negotiations tilted toward employees.• Fiscal stance: the 2026 state budget remains expansionary, delaying any belt-tightening to 2027.

What drags growth back below 2 % in 2027

The same factors that super-charge 2026 will fade twelve months later. PRR money dries up, Brussels-imposed deficit rules return in full force, and Lisbon pledges to sink at least 2 % of GDP into defence spending as part of NATO commitments. Meanwhile, the United States’ tariff hikes shave roughly 0.05 percentage points off Portuguese output, according to Finance Ministry estimates. The OECD warns of “increased external uncertainty” ranging from supply-chain rerouting to fragile euro-area demand.

Sector check-in: who carries the load?

• Tourism is still king: industry studies put the sector on track for 21 % plus of GDP by mid-decade, though growth normalises to about 2.5 % a year after the post-pandemic boom.• Manufacturing & construction benefit from PRR-funded infrastructure and re-shoring trends, but face higher energy costs.• Technology punches above its weight: foreign investors keep pouring money into Lisbon and Porto start-ups focused on biotech, robotics and quantum computing.• Exports of goods and services grow roughly 3 % a year through 2027, slowed by trade frictions but helped by a weak euro.

Inside-Portugal debate: four institutions, four outlooks

Bank of Portugal – sticks with 2.2 %/1.7 % for 2026-27, flagging execution risk on EU projects.

Conselho das Finanças Públicas – more cautious at 1.8 %/1.6 %, citing underwhelming public investment.

Católica-Lisbon NECEP – surprisingly upbeat, seeing 2 % in 2026 and 2.2 % in 2027 if the global cycle turns.

Government – Economy Minister Manuel Castro Almeida insists Portugal can “grow consistently above the EU average,” betting on productivity gains and positive net migration.

Policy levers still on the table

To sustain momentum, the cabinet is drafting a bundle of housing, innovation and debt-management reforms. Highlights include slashing VAT on new construction, widening rental tax breaks, and reshaping the innovation agency to funnel grants toward high-tech SMEs. Debt remains a long-term headache—public liabilities are projected to dip below 90 % of GDP but could climb again once ageing-related costs kick in.

What it means for households and businesses

For residents, the key takeaway is that 2026 brings tailwinds: pay cheques rise, taxes fall and job prospects stay strong. By late 2027, however, credit may tighten and wage growth cool. Export-oriented firms should prepare for softer foreign orders, while domestic-facing companies can still ride resilient local demand. Economists agree on one point: avoiding another boom-and-bust cycle hinges on lifting productivity, a challenge that goes well beyond any single forecast.