Our economic outlook for Brazil

Geopolitical developments and AI are shaping the global backdrop for Brazil, while fiscal policy remains the key domestic risk. Geopolitical effects are more immediate, reflecting recently announced U.S. tariffs on some Brazilian goods and higher energy prices. Over time, Brazil could benefit from AI-related investment through its clean energy base, geopolitical position, and role as a major producer of copper and iron ore. Domestically, elevated public debt and uncertainty ahead of the October general election remain important risks to the outlook.

Near-term data continue to point to an expanding economy. GDP grew 2% year over year in the second quarter, albeit with private consumption and investment slowing. Recent indicators also point to signs of moderation in manufacturing and in consumer and business confidence. While the unemployment rate is close to historical lows, softer hiring and weaker employment in business surveys suggest that labor demand is gradually cooling. We expect growth to moderate over the forecast horizon as the impulse from fiscal policy fades.

Inflation has declined from last year’s 5.5% peak, but the disinflation process is ongoing. Headline inflation stands at 4.2%, above the 3% target of the Central Bank of Brazil (BCB). While the appreciation of the real has helped disinflation by moderating tradable-goods inflation, services inflation remains elevated. Further, medium-term inflation expectations have fluctuated within the BCB’s tolerance interval but have not settled at the 3% target, offering limited support for further disinflation. Energy-price volatility and a tight labor market should keep inflation persistent, leading to only a gradual return to target.

The BCB lowered the Selic rate by 25 basis points to 13.75% in September, continuing the calibration of its highly restrictive monetary policy stance. We anticipate that easing will continue next year but remain cautious, with scope for the pace to pick up once the inflation and fiscal outlooks become clearer.