Banco de Portugal lifts 2026 GDP growth forecast to 2.3% as housing deficit persists

Economic growth projections revised upward

The Banco de Portugal raised its 2026 gross domestic product growth forecast to 2.3% in its October Economic Bulletin, published on 7 October 2026. The new estimate represents an increase of 0.5 percentage points from the 1.8% expansion forecast in June 2026, aligning the central bank with the government's state budget target. The central bank also lifted its 2027 growth projection by 0.2 percentage points to 1.8%, while activity in 2028 is forecast to grow at 1.8%. The upward revision was driven by second-quarter GDP growth of 0.9% quarter-on-quarter, outperforming the central bank's earlier 0.4% forecast. Economic activity is supported by European Recovery and Resilience Plan funds, a rebound in exports following market share losses in 2025, and budgetary measures such as retroactive personal income tax cuts and extraordinary pension supplements.

Inflation trajectory and labor market moderation

Annual inflation is forecast to reach 3.1% in 2026 before slowing to 2.4% in 2027 and 2.0% in 2028. The central bank expects price pressures to ease as energy supply shocks dissipate and labor cost growth moderates, bringing domestic inflation in line with the European Central Bank target for the euro area. External risks remain tilted toward higher inflation and lower growth due to Middle East geopolitical tensions and energy commodity volatility. The labor market is projected to stay stable, with the unemployment rate holding at 5.6%. Employment growth is projected to slow from 1.7% in 2026 to 0.7% in 2027 and 0.3% in 2028, reflecting reduced migration flows compared to the 2021–2024 period.

Fiscal surplus prospects and spending rules

Banco de Portugal Governor Álvaro Santos Pereira stated that Portugal is positioned to achieve a budget surplus in 2026 and potentially in 2027, aided by higher tax receipts from stronger output. Santos Pereira addressed fiscal management following commentary from his predecessor Mário Centeno regarding public spending expansion. Under European Union fiscal rules, maintaining a budgetary surplus or near-balance through 2028 will prevent Portugal from entering excessive deficit procedures. Santos Pereira noted that public investment levels have remained unsustainably low, calling for structural choices between operational spending and state capital investments.

I think it is obviously important to control spending, but as long as we maintain the surplus we will not have a problem.

Housing shortage and macroprudential measures

Santos Pereira emphasized that Portugal faces an accumulated deficit of 300,000 residential properties, comparable to the total housing stock of Lisbon. Speaking at the presentation in Lisbon, the governor stressed that construction activity remains insufficient across both public and private developments. In response to steep housing price increases and accelerated mortgage borrowing, the central bank tightened macroprudential credit limits. Santos Pereira added that upcoming interest rate movements will require close monitoring to assess their impact on credit demand and real estate markets.

We have a shortage of 300 thousand houses in this country, which is equivalent to all of Lisbon.