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 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, relatively neutral geopolitical position, and role as a major producer of copper and iron ore.

Domestically, elevated public debt remains an important risk to the outlook. The first round of the October election sent the presidential contest to an October 25 runoff and prompted markets to price in a greater prospect for fiscal consolidation. However, the eventual policy direction remains uncertain, and the next administration will face a difficult trade-off between supporting activity and stabilizing the public-debt trajectory.

Near-term data continue to point to an expanding economy, but momentum has weakened. While GDP grew 2% year over year in the second quarter, recent indicators suggest slowing economic activity in the third quarter, with softer consumer spending, industrial activity, and business confidence. The labor market remains a source of resilience: Unemployment held at a historically low 5.3% in August and formal job creation rebounded, although broader hiring indicators suggest that labor demand is gradually cooling. We continue to expect 2.2% GDP growth in 2026, but the weaker flow of activity data and the fading fiscal impulse leave risks tilted to the downside.

Inflation has declined from 2025’s peak of 5.5%, but the disinflation process remains incomplete. Headline inflation was 4.6% in September, 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. Additionally, medium-term inflation expectations have generally 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 to 13.75% in September, in line with our expectations. Subsequent communications left the size of the easing cycle open and emphasized growing evidence that restrictive monetary policy is weighing on activity and credit. The BCB also lowered its 2026 growth forecast, although it continues to project inflation above the tolerance range by year-end and sees expectations for longer horizons as elevated. We therefore maintain our 13.75% year-end forecast for the Selic rate, though risks are tilted toward additional cuts if activity and inflation data provide sufficient room, and should fiscal consolidation become more likely.