The Bank of Portugal (BdP) updated its economic projections for the national economy on Tuesday, which indicate an upward revision of the Gross Domestic Product (GDP) growth forecast for 2025 to 1.9%, partly driven by private consumption due to the reduction in IRS.
In its October Economic Bulletin, the central bank predicts GDP will rise by 1.9% in 2025 compared to 2024, whereas the previous forecast in June suggested a 1.6% increase. However, this variation remains below the 2.3% prediction made by BdP in March this year.
For the next two years, the central bank’s projections remain unchanged. Growth is expected to be 2.2% in 2026 and 1.7% in 2027, maintaining the pace anticipated in the previous bulletin.
“The 0.3 percentage point revision of GDP growth for 2025 reflects the incorporation of the latest national accounts data and higher growth projected for the second semester,” the central bank explains, adding that the release of annual national accounts revealed “higher GDP growth in 2023 and 2024 (0.5 and 0.2 percentage points, respectively).”
The revisions, it details, “reflect a greater contribution from domestic demand,” due to “upward revisions in the contributions of private consumption, public consumption, and investment” in 2023 and “a greater contribution from investment” in 2024.
Simultaneously, “the quarter-on-quarter GDP variation for the first quarter was also revised upwards by INE, and the second quarter’s growth surpassed the projection in the June Economic Bulletin (0.2 and 0.3 percentage points, respectively),” says the BdP.
Two measures expected to boost consumption
According to the central bank, two measures are expected to boost consumption: the reduction in IRS approved by parliament in July, felt in wages of workers and pensioners from August, and the extraordinary supplement to pensioners in September.
In the bulletin, the BdP refers to these two factors. “New budgetary measures were taken with a positive impact on household disposable income in 2025, namely a new IRS reduction, with retroactive effects to the beginning of the year, and an extraordinary supplement for lower pensions,” it notes, recalling that “similar to what happened in 2024, the update of withholding tax tables to reflect IRS changes introduces volatility in the quarterly profile of disposable income, with effects extending into 2026.”
From 2025 to 2027, Portugal is expected to grow above the euro area’s average (2% against 1.2% in the monetary zone). The GDP per worker is 0.9%, compared to 0.6% in the euro area, forecasts the central bank.
Should the 1.9% variation be confirmed, the GDP growth level will still be below the figure predicted by the Government of Luís Montenegro (PSD/CDS-PP) in the State Budget for 2025, which was 2.1%. On September 11, the Minister of Finance, Joaquim Miranda Sarmento, acknowledged that the pace “is below the Government’s target, ambition,” although the performance continues to surpass that of the euro area.
In the BdP forecasts, private consumption this year, instead of varying by 2.2%, is expected to grow by 3.3%.
For public consumption, the central bank projects a variation of 1.6%, also better than the 1.1% forecast in June.
And in the labor market?
The Bank of Portugal (BdP) points to a slowdown in the employment level in the country and a stabilization in the unemployment level until 2027.
In the Economic Bulletin, the central bank predicts that after a 0.7% variation in 2024, employment will grow by 1.8% this year, followed by a slowdown, with variation reducing to 0.9% in 2026 and 0.5% in 2027.
“An employment slowdown and stabilization of the unemployment rate at low values is projected,” summarizes the BdP, noting that after an average growth of 1.3% in 2023 and 2024 and a progression of 1.9% in the first half of 2025, “employment should continue to register increases in the projection horizon, albeit gradually smaller.”
Regarding unemployment, the BdP estimates the rate will decrease from 6.4% in 2024 to 6.2% in 2025, then rise to 6.3% in the following year and remain at the same percentage in 2027.
