Our economic outlook for Brazil

Following the president’s reelection in the October 25 runoff, the real and Brazilian financial markets weakened, bringing renewed attention to the fiscal outlook. Elevated public debt remains an important risk, and the administration will face a difficult trade-off between supporting activity and stabilizing the public-debt trajectory. Without a credible fiscal adjustment, the economy may instead adjust through tighter financial conditions and weaker private demand. Meanwhile, Brazil should continue to benefit from its trade links with the United States and China, as well as from its role as a major producer of agricultural products, energy, and critical minerals.

Economic activity has lost momentum as restrictive monetary policy weighs more heavily on domestic demand. Recent data point to weakness in consumer spending, industrial activity, and business confidence. The fiscal outlook is also likely to weigh on growth: Either the government reduces its support for the economy to stabilize public debt, or insufficient fiscal adjustment keeps financial conditions tight and further restrains private demand. The labor market should provide some cushion, with unemployment falling to a historically low 5.2% in September and employment likely to remain relatively resilient through 2027. Overall, we have lowered our growth forecast for both 2026 and 2027. We nevertheless remain somewhat more optimistic than consensus, reflecting our stronger outlooks for the United States and China, two of Brazil’s most important trading partners.

Inflation has moved broadly sideways in recent months, showing limited progress toward the 3% target of the Central Bank of Brazil (BCB). In September, headline inflation rose from 4.2% to 4.6%, moving slightly above the 4.5% upper bound of the BCB’s tolerance range. The increase largely reflected the expiration of a temporary electricity rebate, while higher fuel and food prices added to near-term pressures. Supply shocks, including renewed pressures from oil and energy prices and climate-related effects on agricultural costs, should also make disinflation more gradual. We have therefore raised our 2026 and 2027 inflation forecasts, even as weaker activity helps contain domestic demand.

The BCB kept the Selic rate unchanged at 13.75% in November, pausing its easing cycle as a weaker activity outlook was offset by higher inflation. While we expect the policy rate to remain at 13.75% through year-end, weaker activity could tilt the BCB to a cautious cut. As activity weakens, we expect the BCB to resume cutting rates gradually in 2027. Fiscal uncertainty, elevated inflation expectations, and potential exchange-rate pass-through should constrain both the pace and the ultimate extent of the easing cycle.

Thor Solanes contributed to this report.