Portugal's Unemployment Rate Edges Down to 6.6% in Q1 2025, Offering Glimmer of Hope for Labor Market

Portugal’s labor market showed a modest improvement in the first quarter of 2025, with the unemployment rate dipping to 6.6%—a slight reversal from the 6.7% recorded in Q4 2024. While this decline is modest, it marks a critical turning point after a period of rising joblessness, offering cautious optimism for investors and policymakers. The data underscores a fragile recovery in a market still grappling with underutilization, youth unemployment, and shifting workforce dynamics.

The Q1 2025 unemployment rate remains slightly above Portugal’s 2024 annual average of 6.4%, but the quarterly improvement suggests stabilization in a sector that had been under pressure from slowing economic growth and rising labor costs. The number of unemployed individuals fell to 362,700, a 1.5% drop from Q4 2024, though this still leaves roughly 10,000 more unemployed compared to Q1 2024. Meanwhile, the employed population grew by 0.5% quarter-over-quarter to 5,176,000, driven by gains in sectors like tourism and technology.

Underlying Trends: Strengths and Weaknesses

The labor market’s mixed signals are evident in deeper metrics. The labor underutilization rate—which includes part-time workers seeking full-time roles and those marginally attached to the workforce—dropped to 10.8% in Q1 2025, down 0.3 percentage points from the previous quarter. This improvement, however, still leaves underutilization above pre-pandemic levels, reflecting persistent slack in the economy.

Youth unemployment remains a persistent challenge. The rate for ages 16–24 fell to 21.1% in Q1 2025, down from 21.6% in Q4 2024 but still 1.7 percentage points higher than the same period in 2024. Long-term unemployment among youth also rose slightly to 37.2%, complicating efforts to build a sustainable workforce pipeline.

Telework participation, a key indicator of modern labor dynamics, continued its upward trajectory, with 21.2% of workers (1,095,000 people) reporting remote work arrangements—a 0.7 percentage point increase from Q4 2024. This trend may signal structural shifts favoring sectors like IT and professional services, which could attract investment in digital infrastructure and remote-friendly industries.

Regional and Sectoral Implications

The recovery is uneven across Portugal’s regions and industries. Urban centers like Lisbon and Porto, which dominate tech and financial services, saw stronger employment gains, while rural areas lagged. The construction sector, a traditional employment pillar, faced a 2.3% quarterly decline in jobs, likely due to cooling housing markets. Conversely, tourism rebounded strongly, with hotels and restaurants adding 15,000 jobs in Q1 2025 as international travel rebounded.

Investors should also monitor Portugal’s PSI 20 stock index, which has risen 8.2% year-to-date in 2025, reflecting optimism in sectors like banking and utilities. However, broader market gains may hinge on sustained job creation and wage growth.

Risks and Challenges Ahead

Despite the quarterly improvement, risks persist. The inactive population—those not seeking work—declined slightly to 4,320,000, but this group still accounts for over 30% of Portugal’s working-age population, signaling untapped labor potential. Meanwhile, inflation, though slowing, remains elevated at 3.2%, squeezing real wages and consumer spending.

External factors, such as the EU’s energy crisis and global demand for Portuguese exports (e.g., automotive parts and textiles), could also disrupt progress. Portugal’s manufacturing sector, which relies heavily on EU imports, faces headwinds from supply chain bottlenecks, potentially limiting job growth in key industries.

Conclusion: A Fragile Green Shoot

The drop to 6.6% unemployment is a positive sign, but investors should view it as a single data point in a complex landscape. While the labor market’s stabilization supports consumer-facing sectors like retail and hospitality, structural issues—youth unemployment, underutilization, and regional disparities—demand attention.

The data suggests a cautious “buy the dip” strategy for Portugal’s equities, particularly in tourism and tech, while hedging against broader economic risks. For long-term investors, the decline in unemployment hints at a labor market recalibration, but the path to sustainable growth hinges on addressing underemployment and fostering skills alignment with emerging industries. As Portugal’s economy navigates these crosscurrents, the 6.6% rate is a step forward—but not yet a sprint.