The war in the Middle East is set to slow Portugal’s economic growth and significantly erode consumers’ purchasing power, according to the International Monetary Fund (IMF) in its latest World Economic Outlook, released on Tuesday in Washington, DC.
The IMF has revised down its forecast for Portuguese economic growth in 2026 by two-tenths of a percentage point, to 1.9%, compared with the 2.1% projection issued six months ago. The downgrade reflects the initial impact of the oil price shock and the ongoing conflict in the Middle East, a war with no clear end in sight and surrounded by considerable uncertainty. Even so, the new estimate remains slightly above the Bank of Portugal’s December forecast of 1.8%.
The IMF figures also indicate that the economic growth assumption underpinning this year’s State Budget (OE 2026), set at 2.3%, is now clearly outdated.
Inflation presents a more troubling picture. Six months ago, the IMF expected price growth in Portugal to normalise in line with European Central Bank targets for the euro area.
In October, the Fund projected consumer price inflation at 2.1%. In the new outlook, however, inflation is expected to accelerate sharply, reaching an average of 3.1% in 2026, well above the 2.6% forecast for the eurozone as a whole.
Eurozone inflation itself would therefore remain outside the ECB’s target range, signalling the likelihood of further interest rate increases. ECB President Christine Lagarde has already hinted at such a move, and analysts and financial markets widely expect a rate rise as early as the end of this month.
The ECB’s benchmark rate is expected to climb from the current 2% to 2.25%, with a further two or three increases anticipated before the end of the year.
The IMF likewise assumes several additional interest rate hikes set in Frankfurt over the coming months, according to the World Economic Outlook.
“The euro area policy rate is projected to rise by 50 basis points [0.5 percentage points] over the course of 2026,” the IMF states, implying that central bank rates could reach around 2.5% by year’s end.
For Portugal, however, there is one positive development. The unemployment rate is the only major indicator showing improvement. In October, the Fund expected unemployment to stand at 6.3% of the labour force this year; it now forecasts a lower rate of approximately 5.9%.
Source: IMF
