The State of the Nation – the good, the bad, and the ugly

Overseas, Portugal is gaining a reputation for good financial housekeeping with budget surpluses in recent years, a pay down on the national debt to 89.7% of GDP, robust exports, and a thriving technology ecosystem built on data and AI centres and successful startups.

On the other hand, Portugal is a country with a clear immigration problem, poor productivity, a painful lack of medium and large-size companies, and in which finding a home that fits the average pocket of the Portuguese is getting more difficult with every year.

Yesterday, the various political parties discussed the State of the Nation and while accepting that Portugal’s public accounts were in a better state than five years ago, there were still persistent inequalities.

There was good news on unemployment which is at its lowest level since records began, but productivity continues to be a structural problem, labour productivity is among the lowest in the European Union. Measured by GDP per hour worked, Portugal sits at roughly 67% of the EU average. Only Latvia, Bulgaria, and Greece record lower levels. While Portuguese workers log some of the longest hours, the economic value generated is low.

Then the increase in house prices fuelled by high demand from both Portuguese nationals and overseas buyers and investors, coupled with a lack of supply has made things worse for the middle classes.

Basically, a portrait of a country operating at two speeds was painted by MPs where salaries have increased but the country’s companies – most of which are micro and small companies – are simply not producing much wealth.

The picture that emerges from five indicators compiled by ECO is that of a country that has improved across many macroeconomic indicators over the last decade while simultaneously struggling to translate that progress into quality of life for a significant portion of its population.

Growth is slowing

After growing 2.2% in 2024, the national economy slowed to 1.9% in 2025, according to data confirmed by the National Statistics Institute in February. For this year, the Bank of Portugal has revised its projections downward, now forecasting growth of 1.8%.

The trend is one of a slowdown, set against a backdrop where exports have virtually stagnated—growing by just 0.4% in 2025—and where US trade tariffs are introducing heightened uncertainty into the external environment.

What makes this slowdown politically sensitive is the context. Portugal is growing, but the margin by which it exceeds the Eurozone average is narrowing, and positive contributions are stemming primarily from domestic consumption and investment rather than from gains in competitiveness. Net external demand made a negative contribution of 1.8 percentage points to growth in 2025—a sign that the export engine, which drove Portugal’s performance so strongly over the last decade, is losing momentum.

GDP growth starts, stops and splutters

Following the strong post-pandemic recovery, the country’s growth slowed to 1.9% last year. The latest forecasts from the Bank of Portugal point to an even sharper slowdown in 2026 and 2027, as the economy loses export momentum.

Debt going down

Last year, public debt stood at 89.7% of GDP, beating the government’s own target (which was 90.2%) and representing a drop of nearly four percentage points in a single year.

In the first quarter of this year, the ratio rose slightly to 91% of GDP due to seasonal factors, but the medium-term trajectory remains downward. For comparison: in 2020, debt stood at 134.1% of GDP.

This is arguably the quietest success story of recent years. Twenty years after Portugal stood on the brink of a public finance collapse and underwent a bailout, the country ended 2025 with a budget surplus of 0.7%, surpassing all forecasts and joining the select group of five European Union member states with positive balances.

Public finances gain breathing room with lower debt. This is one of the major success stories in recent public finance. State debt has dropped sharply since the pandemic and is now below the 90% of GDP threshold, easing pressure on the public accounts. However, it remains far from the European target of 60% of GDP—a level it is expected to maintain in the coming years.

Unemployment at record low

The unemployment rate ended last year at 6%—the lowest figure since 2011—marking a 0.4 percentage point drop compared to the previous year. In absolute terms, the country had 5.3 million employed people in 2025, an increase of 163,000 over 2024. The picture appears solid, until one looks at the most recent data.

In the first quarter, unemployment rose to 6.1%, with a net loss of nearly 40,000 jobs in just three months. This is a warning sign that the parliamentary debate can hardly ignore.

The labour underutilisation rate (which aggregates the unemployed, the part-time underemployed, and inactive individuals available for work) fell to 9.6% in December 2025—the lowest level since 2011—but this improvement coincided with a 0.4% drop in productivity over the year, while average wages rose by 4.8%. This combination caused unit labor costs to surge by 5.3%. In other words, Portugal is creating more jobs without generating more wealth per hour worked, a structural problem that successive governments have put off addressing.

Housing few can afford

Housing prices rose 17.6% in 2025—the highest growth since the INE began tracking this indicator in 2009—while the total value of transactions reached €41.2 billion, with nearly 170,000 homes sold (records in both categories).

The trend did not slow down in the first quarter of this year. Data from the INE revealed that, between January and March, housing prices rose by 17.8% year-on-year, even though the number of transactions fell by 8.7% over the same period. This is the classic equation of a market where supply cannot keep pace with accumulated demand.

In the rental market, the median rent for new contracts reached €9.46 per square meter in the first quarter—a 9.1% increase compared to the same period last year. For a worker earning the minimum wage of €920, the numbers simply do not add up—and likely never will until there is more supply in the market.

Gulf between salaries and productivity widens

Last year, the average monthly gross remuneration per worker reached 1,694 euros, an increase of 5.6%—surpassing the 4.7% set in the Tripartite Agreement on Wage Enhancement.

Furthermore, the minimum wage reached €920—an increase of €50, or 5.75%, over the previous year—and estimated real purchasing power gains for 2025 stood at 3.2%. However, hourly productivity in Portugal remained 28% below the European average in 2025.

Raising wages is essential and politically urgent, but doing so without productivity gains amounts to distributing today what has not yet been created, with predictable consequences for business competitiveness and inflation.

Sources: Lusa and Eco

ANTÓNIO PEDRO SANTOS/LUSA
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