OECD Economic Outlook, Volume 2025 Issue 1

Brazil

Real GDP is projected to expand by 2.1% in 2025 and 1.6% in 2026. Household consumption will continue to be the principal driver of growth, even if slowing, bolstered by robust wage increases. Private investment experienced a marked pickup in 2024 and is expected to remain buoyant despite easing gradually. Export momentum is projected to improve modestly, albeit against a backdrop of significant exposure to demand from China. Inflation is projected to remain above the 3% target throughout both 2025 and 2026, driven predominantly by the services sector.

Fiscal policy is expected to remain slightly expansionary in 2025. A proposed income tax reform, designed to be tax-neutral, is unlikely to generate additional fiscal space to accommodate rising spending pressures. Social expenditures are set to continue to rise, putting further pressure on the public finances. A tight monetary policy stance is projected to continue for some time. Lowering market entry and exit barriers, easing regulations, boosting infrastructure investments and fostering competition have significant potential to boost productivity and growth.

Economic activity is slowing down

Despite robust GDP growth of 3.4% in 2024, early signs of an economic slowdown emerged toward the end of the year. Domestic demand weakened, driven by a decline in household consumption coupled with lower investment, as heightened uncertainty, rising policy rates, and persistent inflation undermined both business and consumer confidence. Industrial production remains subdued, but after five consecutive months of stagnation, it grew by 1.2% in March. Retail sales have moderated after a 4.7% annual increase in 2024. Conversely, the services sector maintained its strong momentum in early 2025, propelled by the information and communications sector. In agriculture, the 2025 harvest is projected to be much stronger than in 2024, which was affected by a drought. Although unemployment edged up slightly to 6.8% in February from its historic low in November, the labour market remains resilient, as evidenced by record-high formal-sector employment and earnings.

Brazil 1

1. Moving average.

Source: CEIC; Banco Central do Brasil; OECD Economic Outlook 117 database; and OECD calculations.

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Brazil: Demand, output and prices

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Inflation rose to 5.5% in April. This increase was driven primarily by higher costs of electricity, food, and beverages, in addition to persistent price pressures in services. Core inflation also rose, and inflation expectations remain persistently above the target for 2025. Exports to the United States represent 12% of total exports, but less than 2% of GDP. Manufactured goods account for over 78% of shipments to the United States and are subject to the 10% additional tariff while steel, aluminium and auto parts are affected by a larger tariff increase to 25% and an elimination of quotas and exemptions. Brazil may benefit from higher demand for commodities and agrifood by third countries, especially China.

Brazil 2

1. The shaded area corresponds to the inflation tolerance band.

2. Flows accumulated in 12 months.

Source: OECD Economic Outlook 117 database; and Banco Central do Brasil.

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A challenging macroeconomic policy mix

The Central Bank has continued its monetary tightening cycle, raising the policy rate four times since November, from 11.25% to 14.75% in May 2025. This tightening is intended to address price pressures from a positive output gap, a tight labour market with robust wage growth, an ongoing fiscal expansion, and a depreciating currency, all of which are driving inflation expectations higher. Despite heightened policy uncertainty, the projections include further rate increases, bringing the policy rate to 15% towards the end of 2025, before a gradual reduction to 12% by the end of 2026 as inflationary pressures ease.

Fiscal policy is expected to remain modestly expansionary, posing challenges for meeting the primary balance target. Under the current fiscal rule, the government is required to achieve a balanced primary budget in 2025 and a primary surplus of 0.25% of GDP in 2026. However, persistent spending pressures from social benefits and strict minimum spending requirements for healthcare and education, pose significant challenges for meeting these targets. Moreover, slower economic activity is likely to constrain government revenue growth. This financing gap may end up being bridged by one-off measures, such as increased dividend and royalty receipts, or by broad-based expenditure freezes. Additionally, interest payments, currently estimated at around 8% of GDP, will continue to follow rising interest rates, increasing the growth of gross public debt.

Growth is set to ease

Economic growth is projected to ease from 3.4% in 2024 to 2.1% in 2025, and 1.6% in 2026. The moderation is largely driven by a slowdown in domestic demand. Household consumption is expected to soften as higher inflation and weaker consumer confidence take their toll. After a strong rebound in 2024, private investment will likely become weaker over 2025 and 2026 due to softening external demand and the impact of higher interest rates. On the supply side, the manufacturing sector faces challenges from rising tariffs in the United States, which remains the primary destination for Brazilian manufacturing exports. Annual inflation is forecast at 5.7% in 2025 before easing slightly to 5.0% in 2026. This reflects quarterly inflation gradually converging toward the target, reaching around 4% in the final quarter of 2026, although intermittent upticks from trade and tariff shocks remain possible.

The projections are subject to several risks. Fiscal slippage could dampen investment and erode confidence. Inflation risks are slightly tilted to the upside as persistent financial market tensions and further currency depreciation could intensify price pressures. Moreover, any additional deterioration of confidence in the fiscal outlook would likely extend the current episode of unanchored inflation expectations and require higher interest rates for longer, further undermining the economic outlook.

Consolidating public spending while expanding infrastructure investment

Fiscal consolidation is essential to put public debt on a declining trajectory. Reforming automatic spending rules, particularly those concerning education and healthcare, would allow greater flexibility to address priority challenges, and adjusting the indexation formula for public pensions and social benefits would reduce the burden of these benefits on the public finances. Stringent regulations and high administrative burdens on goods and services markets hinder competition and hamper the entry of new firms, thus dampening productivity growth and investment. Although recent measures have trimmed unnecessary bureaucracy, further reductions in regulatory burdens and licensing requirements remain critical. Easing entry restrictions in professional services, including abolishing exclusive rights for certain ancillary tasks, could reduce the cost of doing business, thereby boosting competition and enhancing productivity. Moreover, enhanced access to foreign markets and deeper integration into global value chains can be achieved by lowering existing trade barriers. Public spending on infrastructure could become more effective by addressing shortcomings in planning and project execution, as more than 30% of public infrastructure projects are interrupted either temporarily or permanently. Expanding technical assistance to subnational governments, which frequently face capacity constraints for infrastructure project preparation and procurement, would significantly enhance the planning and delivery of such investments. Finally, unlocking additional private financing sources is crucial for bridging infrastructure gaps in the medium term. A comprehensive reassessment of current risk-sharing mechanisms and a concerted effort to minimise policy risks and judicial uncertainty could improve the framework conditions for private infrastructure investments.