Portugal growth strengthens on household demand

Portugal’s economy expanded 2.3 per cent year on year in the first quarter, accelerating from 1.9 per cent at the end of last year as domestic demand offset pressure from trade and weather-related disruption.

The first-quarter reading confirmed that the economy entered 2026 with firmer underlying demand than much of the euro area, even though output was flat compared with the previous quarter. The annual pace matched the preliminary estimate released at the end of April and marked the strongest yearly expansion since late 2024.

Domestic demand was the main driver, rising 4.1 per cent after growth of 3 per cent in the previous quarter. That improvement reflected stronger investment and continued support from household spending, helped by wage gains, employment resilience and European Union-funded projects. Exports increased 1.7 per cent after a decline in the previous quarter, but imports rose at a faster pace as stronger internal demand lifted purchases from abroad.

The mixed composition points to an economy that remains supported by consumers and capital spending but is still vulnerable to external demand, higher energy costs and weaker conditions in key trading partners. Net external demand made a negative contribution as import growth exceeded export growth, limiting the effect of the rebound in sales abroad.

Quarter-on-quarter stagnation followed a 0.9 per cent rise in the final three months of 2025. The flat reading was linked partly to storms and floods that hit central Portugal in January and February, disrupting activity in areas tied to exports, agriculture, transport and small business services. The impact was temporary, but it exposed the sensitivity of regional supply chains and export-oriented sectors to climate-related shocks.

Portugal’s performance still compared favourably with the wider euro area, where growth remained subdued at the start of the year. The eurozone expanded only 0.1 per cent quarter on quarter in the first quarter, while the European Union also posted modest growth. The broader backdrop remains shaped by weak manufacturing, cautious investment decisions and higher energy prices across several economies.

Inflation added a more complicated element to the outlook. Consumer prices rose 3.3 per cent year on year in April, up from 2.7 per cent in March, while the harmonised measure used for European comparison stood close to the national reading. Energy costs were a major source of pressure, with fuel and utility-linked categories reversing some of the disinflation that had helped households last year.

Food, transport, housing and utilities also contributed to higher price pressures. Food and non-alcoholic beverages rose more quickly than in March, while transport inflation accelerated as fuel costs increased. Restaurants and hotels continued to show firm price growth, reflecting wage costs, tourism demand and service-sector pricing power.

The inflation move matters because Portugal’s growth model has benefited from improving real incomes and private consumption. A renewed squeeze on purchasing power could soften demand later in the year, especially if energy prices remain volatile and firms pass higher costs to consumers. The European Central Bank’s policy stance also remains relevant, with borrowing costs still influencing mortgages, credit demand and business investment.

The government and the Bank of Portugal have taken a cautious view of the year ahead. The central bank’s projection for 2026 growth stands below the government’s more upbeat assumptions, reflecting concerns over weaker external demand and energy-related uncertainty. Investment linked to EU recovery funds remains one of the most important buffers, particularly for infrastructure, digitalisation and business modernisation.

Tourism continues to provide support, although it also brings policy challenges. Strong visitor numbers have helped services, employment and tax revenues, but rising accommodation costs and pressure on urban housing remain politically sensitive. Lisbon, Porto and Algarve municipalities face growing pressure to balance tourism income with affordability concerns for residents.

The labour market has remained a stabilising force. Employment levels are high by historical standards, and wage growth has supported household income. However, businesses in hospitality, construction, technology and care services continue to report skills shortages. Labour supply constraints could limit expansion if investment projects accelerate while demographic pressures persist.

Public finances remain another point of strength. Portugal has worked to reduce debt ratios after the pandemic-era surge, and stronger nominal growth has helped budget metrics. Lower debt vulnerability gives policymakers more room than in past downturns, though spending pressures are rising in health, housing, pensions and public-sector wages.

The first-quarter data therefore presents a stronger annual growth picture but not an unqualified acceleration. Domestic demand is carrying the expansion, investment remains active, and exports have regained some momentum. At the same time, flat quarterly output, negative net trade and renewed inflation pressure show that momentum is uneven.