Economic activity slowed in 2016 due to a loss of momentum attributable to a contraction in investment, particularly in construction, and a slowdown in private consumption and exports (despite a rebound in sales abroad in the 3rd quarter). Growth is expected to remain modest in 2017 due to a very tentative recovery in investment and a slight loss of momentum in private consumption, a weakness that is expected to result from continued high levels of corporate and household debt, weak credit, an inadequate fall in unemployment, rising energy prices and an environment which has become more uncertain in the Euro zone. Exports are expected to increase only slightly, mainly because of rising wages, which will affect competitiveness. In this context, inflation is expected to remain contained, despite the rise in oil prices. The current account balance returned to positive territory in 2013 and has remained in equilibrium since. This should still be the case in 2017 thanks to tourism and manufacturing sales, although growth outside the EU (Angola) and fuel sales remain sluggish.

Business failures, primarily affecting the wholesale and retail trade, as well as the property sector, declined slightly in 2016, a trend which is likely to continue in 2017. Although declining, corporate debt remains high (152% of GDP in mid-2016) and is dampening investment, also hampered by cumbersome administrative procedures, ineffective judicial proceedings (insolvency regime in particular) and the lack of competition in professional services. The banking sector remains very fragile, still burdened by the weight of non-performing loans (about 12% of all lending) and posting low profitability. This concerns mostly low-productivity firms in the non-tradable goods sector and limits the ability of banks to lend to viable firms, while making the financial system vulnerable to shocks. In a context of low inflation, low growth and low interest rates, the sector is struggling to generate the profits which would allow it to strengthen its equity margins. The government has already had to intervene to bail out a number of banks in recent years, including, most recently, Banif. The capital requirements of Caixa Geral de Depósitos and potential losses related to the sale of Novo Banco, established in 2014 from the ruins of Banco Espirito Sento, are likely to require the injection of additional public funds. Although the country posted an excessive budget deficit in 2015, partly related to the rescue of Banif, Portugal avoided European financial sanctions. The country obtained a one-year extension to bring its deficit below 3% of GDP, which was made possible by freezing some government expenditure (intermediate consumption, investment). The continued recovery and a specific transaction (repayment of a guarantee granted to a bank) should help further reduce the deficit in 2017. However, the heavy burden of public debt (130% of GDP) continues to generate substantial risks regarding the sustainability of the debt. The debt dynamics are likely to remain sensitive to macroeconomic shocks and to a potential underestimation of the cost of rescuing the banking sector.

The Portuguese left was united during the no-confidence motion in November 2015, bringing down the centre-right government one month after the parliamentary elections. António Costa's Socialist Party has come to an agreement with the Left Bloc, the Communist Party and the Greens, and has since governed the country with the support of these groups in the Assembly (although they have refused to become part of the government). The prime minister took office on a promise to break with austerity (civil service wages were increased in early 2016, caps on pensions removed and the minimum wage raised) but made a commitment to respect European budgetary rules. This unprecedented alliance appears fragile but, for the moment, the electoral agreement was broken only very temporarily, in late March 2016 on a foreign policy issue. The Prime Minister has so far managed to balance the demands of the European Commission and those of his political allies, but they are urging him to negotiate over debt relief, which could complicate his task.