Economy swings into contraction in Q1

Second release confirms Portugal among the Euro area’s worst performers: A second national accounts release confirmed that the economy started the year on a weaker footing, shrinking 0.5% on a seasonally adjusted quarterly basis in Q1, deteriorating from Q4 2024’s 1.4% rise and marking one of the worst results in the post-Covid era. As a result, Portugal was one of the worst-performing economies in the Euro area, ranking ahead of only Slovenia. Still, the decline was largely a correction from the prior quarter’s stellar performance, which reflected one-off income measures, suggesting Q1’s reading is unlikely to reflect the underlying health of the economy. On an annual basis, economic growth dropped to 1.6% in Q1 from the previous quarter's 2.8%, marking the worst result since Q2 2024.

Correction after one-off income measures and weakening of global car demand hit GDP: Domestically, private spending—which makes up around two-thirds of GDP—shrank 1.1% in Q1 (Q4 2024: +2.8% qoq s.a.) and fixed investment fell 2.5% (Q4 2024: -0.9% qoq s.a.). Both readings were among the worst since the pandemic. Still, this largely reflected a correction following one-off income measures at the tail end of 2024: Household disposable incomes benefited in Q4 from tax cuts—which were retroactive from January 2024—and the payment of an exceptional supplement to pensioners. Underlying consumer spending and fixed investment will have been robust: Real wages rose at a speedy pace, the ECB cut interest rates further and Portugal continued to deploy EU funds. Meanwhile, government spending rose 0.4% in Q1, accelerating slightly from the prior quarter’s 0.3% increase. On the external front, net trade detracted 0.7 percentage points from the sequential reading in Q1 after being the engine of growth in Q4 with a 0.7 percentage point contribution. Exports of goods and services shrank 0.4% in Q1 (Q4 2024: +0.6% qoq s.a.): Global demand for automobiles—Portugal’s top export—swung into contraction in Q1. Conversely, imports of goods and services—which contribute negatively to GDP—rebounded by 1.0% in Q1 (Q4 2024: -0.8% qoq s.a.).

Economy to bounce back and outperform Euro area through Q4 2025: Our panelists see sequential growth returning in the current quarter as the tough base effect fades. They then expect the economy to outpace the Euro average throughout the remainder of 2025. In 2025 as a whole, our Consensus is for the economy to broadly match its past-decade growth average of 2.1%. Key tailwinds include interest rate cuts, the disbursement of EU funds, healthy real wage growth, continued pro-market reforms and fiscal stimulus. Still, the key tourism sector should lose traction following a post-pandemic boom. Moreover, the external sector outlook is clouded by rising U.S. protectionism: A significant increase in duties on EU goods could dent momentum in the bloc, in turn depressing its demand for Portuguese goods and services.

Panelist insight: Analysts at Scope Ratings commented: “Gradually easing financing conditions and lower inflationary pressures, coupled with the expected acceleration in the implementation of the National Recovery Plan, should support real economic growth in the coming years, which we project at 2.1% this year. […] Key risks include the domestic political stalemate delaying reform and hindering the deployment of EU funds but also the volatile global trade environment.”

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