A Resilient Brazilian Economy Is Under Diverging Pressures – Americas Quarterly
- Na Mídia
- 03/07/2025
- Tendências

While the central bank is trying to cool down economic activity, the government continues to implement demand-stimulating measures as elections loom.
By Alessandra Ribeiro*
SÃO PAULO—Brazil’s economy has rebounded after a brief slowdown. The country’s total economic output regained momentum in the first three months of the year, as a boom in agricultural production, paired with higher household consumption and investment, boosted the overall value of goods and services produced. This news could be seen as a welcome development in a year marked by profound global geopolitical shifts, and the nation prepares to elect a new president in fifteen months.
However, there’s a caveat: the momentum may not last.
Brazil’s GDP grew 1.4% in the first quarter following a 0.1% increase in the last quarter of 2024. Despite the gain, the annualized comparison indicates a slowdown is lurking under the surface. With the exception of the key agricultural sector, most parts of the economy are exhibiting a moderate loss of traction.
This slower trend is expected to continue over the next quarters, amid the anticipated global economic slowdown, the lagged effects of the contractionary monetary policy implemented by Brazil’s central bank (BCB), a smaller increase in public spending compared to the past two years, and a persistently high-risk perception regarding the evolution of the nation’s public finances.
In fact, the slowdown is expected to become more noticeable in the second half of this year and into next year, which is likely not the desired outcome for the current administration, given the upcoming presidential election. The bottom line is clear: GDP growth is expected to reach 2.2% this year and grow by only 1.6% next year, following an average annual growth rate of 3.6% over the past four years. If the calculations are correct, the environment will be challenging for President Luiz Inácio Lula da Silva to run for reelection in 2026.
The good mix
The strong pace of economic growth in recent years is related to a combination of structural and cyclical factors. On the structural side, the country has recently reaped the benefits of key structural reforms in the labor market, capital markets, and sectoral activities, particularly through regulatory advances aimed at attracting more private investment—with highlights in sanitation and infrastructure. These reforms have contributed to increasing the country’s growth potential, which we estimate to be around 2%.
In addition to the effects of reforms on the potential growth capacity, the economy has also reflected the impact of cyclical measures remaining from the COVID-19 pandemic. These include delayed and persistent effects over time from significant fiscal and monetary stimulus, as well as a fresh increase in public spending: the ratio of total public expenditure to GDP rose from 18% at the end of 2022 to 19.5% in 2023. Although the economy shows a greater growth capacity compared to recent years, these cyclical stimuli are pushing the economy to grow above its potential, and the side effects are becoming clear.
The labor market has shown vigorous growth, and the unemployment rate is tracking at a historical low, around 6.3% in seasonally adjusted terms (see chart). The ratio between the number of employed people and the working-age population already exceeds the levels seen in 2013 and 2014, when the economy showed significant growth rates—albeit based on unsustainable foundations, which later resulted in two consecutive years of recession.
The rising cost of living
Inflation, in turn, has been above Brazil’s central bank target (3%) and its upper limit (4.5%), hovering around 5.5%, with more sensitive core inflation indicators remaining at elevated levels. Additionally, market inflation expectations do not indicate convergence to 3% before 2028, with only a gradual decline projected over the coming years.
In this context, the central bank has been tightening monetary policy again since the end of last year, bringing the Selic benchmark interest rate to 15% last month. The monetary authority faces a major challenge in promoting inflation convergence toward its targets, as government policies have been contributing to sustaining strong demand—particularly focused on household consumption.
Moreover, these government policies increase the risk perception surrounding public finances, which in turn affects asset prices—such as the exchange rate—and complicates the BCB’s ability to conduct monetary policy effectively.
Given this scenario, monetary policymakers will likely maintain interest rates at current levels for an extended period to ensure a gradual convergence of inflation toward the target. Therefore, we forecast a slight decrease in the benchmark interest rate beginning early next year, which would bring the Selic rate to around 13%—a level that remains highly restrictive.
Whether through direct expansion of public spending or other mechanisms—such as subsidized credit for specific groups and sectors—these policies might keep demand elevated but also reduce the effectiveness of monetary policy. Since part of the credit becomes less sensitive to interest rate changes, the BCB will most likely implement an even more restrictive stance than it otherwise would.
The government’s role
On the fiscal side, these measures raise concerns about the trajectory of public accounts, as their compensation often depends on expectations of increased tax revenues—which may not materialize—making it more difficult to achieve fiscal balance. Our estimates indicate that the government will continue to run a primary deficit of around 0.3% of GDP this year and next, which would push gross public debt above 83% of GDP by 2026.
Considering all factors, the current rapid pace of growth in the Brazilian economy is unsustainable, as it exceeds the country’s potential for growth. The central bank, through its monetary policy, has been working to cool down economic activity and reduce inflation; however, this has been hindered by the government’s demand-stimulating measures. The risk is that this divergence will deepen, increasing both fiscal risks and the likelihood that inflation will not converge to the target.
In this context, the risk is that consumer inflation in 2026 may be higher than projected, and the room for interest rate cuts by the central bank may be virtually eliminated. In other words, the country would face another year of inflation above the target ceiling (4.5%) and highly restrictive monetary policy, considering interest rates remaining around 15%. Assuming that current divergences do not substantially deepen, Tendências projects the consumer inflation rate of 4.5% and a reduction in the Selic rate from 15% to 13% next year.
On the fiscal side, the impact would be seen particularly through a more pronounced increase in public debt. Public debt as a percentage of GDP is already on an upward trajectory, with projections indicating 80% this year and 83.6% in 2026, which would worsen if the identified risks materialize. This scenario would make fiscal reform starting in 2027, under a new presidential term, even more urgent.
From an economic standpoint, the ideal situation is for monetary and fiscal policies to work in the same direction. Thus, the economy would slow down more quickly, resulting in effects on inflation, allowing the BCB to lower the benchmark interest rate at a faster pace. This would allow the economy to grow on a more sustainable basis.
*Ribeiro is Partner and Director of Macroeconomics and Sectoral Analysis at Tendências Consultoria in São Paulo, Brazil.
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