Macroeconomic Context – Stable Growth, Falling Inflation and a Resilient Labour Market

The macroeconomic context of the world, European and Portuguese economies over the next few years should be relatively favourable, with stable growth, a falling inflation rate and a resilient labour market. These conclusions are based on the most recent projections from various entities including the IMF, OECD, World Bank, European Commission, European Central Bank, Bank of Portugal, and the Portuguese Public Finance Council.

World economy

Despite the context of intensifying geopolitical and economic tensions, and the trade war triggered by the increase of tariffs by the United States (US), the world GDP is forecasted to maintain a growth rate of between 2.7% and 3.3% in 2025 and 2026.

As far as inflation is concerned, a gradual moderation of the Harmonized Indices of Consumer Prices (HICP) from 4.2% in 2025 to 3.5% in 2026 worldwide is expected, with faster disinflation expected in advanced economies (2.1% in 2025 and 2.0% in 2026) than in emerging and developing economies (5.6% in 2025 and 4.5% in 2026).

Euro Area

As far as the Euro Area is concerned, the forecasts reflect a gradual acceleration in economic activity in 2025 and 2026, with real GDP growth estimated at 0.9% - 1.0% in 2025 and 1.2% - 1.4% in 2026. These forecasts result from an increase in real wages, employment and consumption, within the context of a resilient European labour market and domestic demand supported by the easing of financing conditions.

As to inflation, a further reduction from 2.4% in 2024 to 2.3% in 2025 and 1.9% in 2026 is expected. This trend is mainly due to the forecasted decline in service price inflation, which has been persistent, as well as the easing of wage pressures and the impact of the previously restrictive monetary policy. Nevertheless, energy price inflation is expected to continue to rise. These estimates are set against the backdrop of a resilient labour market that should continue to expand over the forecast horizon, with the unemployment rate reaching 6.3% in 2025 and 2026.

Portuguese economy

The Portuguese economy is expected to witness a GDP growth of 1.9% - 2.4% in 2025 and 2.0% - 2.1% in 2026. These forecasts result from the easing of financial conditions associated with lower interest rates, the rise of external demand and the execution of European funds.

Inflation is forecasted to fall from 2.7% in 2024 to 2.3% in 2025 and 2.0% in 2026, mainly due to a slower growth in service prices. However, there are external risks that could affect the disinflation, namely the rise in raw material prices or import prices due to possible counter tariffs by the European Union (EU) against the US. Regarding the labour market, employment growth is expected to drop to 1.3% in 2025 and 0.7% in 2026, while the unemployment rate is expected to stabilize at 6.4% over the forecast horizon.

Given the volatility of the current economic, social and geopolitical framework surrounding Porto and Portugal, a cautious approach is necessary when analysing the forecasted numbers.

The full version of this summary will be published in the 2024 Annual Report of the Porto City Council, which will be available soon here.