OECD Economic Outlook, Volume 2025 Issue 2

Brazil

Real GDP is projected to grow by 2.4% in 2025, before moderating to 1.7% in 2026, and rebounding to 2.2% in 2027. Domestic demand will be the main driver of growth. Private consumption will be supported by continued job creation and strong wage growth. High interest rates and global policy uncertainty will continue to weigh on investment in 2026, and higher tariffs on many exports to the United States, if maintained, will eventually weigh on exports. Inflation is expected to ease gradually, remaining above target but within the upper bound of the tolerance band from the second quarter of 2026.

Meeting fiscal targets will be key to maintaining public debt on a sustainable path, reducing inflationary pressures and strengthening confidence. This will require additional efforts to identify durable consolidation measures, including on the expenditure side, and more structural fiscal reforms to reduce budget rigidities. Monetary policy will remain tight amid persistent inflationary pressures but is expected to ease gradually from 2026. Structural reforms to remove regulatory bottlenecks in professional services, network industries and digital markets will be crucial to boost productivity and long-term growth.

Growth is losing momentum

The economy recorded solid growth in the first half of 2025, particularly in the first quarter. A strong harvest boosted agricultural output, which is expected to record an annual increase of 17% in 2025. However, recent indicators point to a gradual loss of overall growth momentum in the second half of the year, with the monthly economic activity index falling by 1.8% since April. Retail sales and industrial output saw modest monthly gains in August, after four consecutive months of contraction, before declining again in September. Services output stagnated in August, following strong momentum earlier in the year. Business sentiment has weakened, with the confidence index falling by over 9% in the past year. In contrast, the labour market remains resilient. Unemployment stood at 5.6% in the third quarter of 2025, marking a historic low, while real household earnings grew by 3.3% year-on-year.

After peaking at 5.5% in April, headline inflation eased to 4.7% in October, amid a reduction in residential electricity bills. Residential electricity prices —up 16% since the beginning of the year— have been a major driver of inflation, alongside food and beverages, and services. The impact of high effective US tariffs of over 30% on imports from Brazil has so far been limited, as a strong agricultural harvest and a successful diversification of export markets have mitigated the tariff impact for now.

Brazil 1

1. Moving quarterly data.

Source: CEIC; Banco Central do Brasil; IBGE; and OECD calculations.

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Brazil: Demand, output and prices

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Brazil 2

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

2. Flows accumulated in 12 months.

Source: OECD Economic Outlook 118 database; and Banco Central do Brasil.

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Monetary policy is tight and additional fiscal consolidation is likely

The Central Bank has continued to tighten monetary policy amid persistently high inflation, raising the key policy rate to 15% in July 2025, from 11¼% in November 2024. A tight labour market, robust wage growth and a sizeable fiscal deficit are fuelling inflationary pressures. Inflation expectations of 4.2% for 2026 and 3.8% for 2027 remain above the Central Bank’s inflation target mid-point of 3%. From 2026 onward, inflationary pressures are projected to ease as demand weakens. This will allow the policy rate to decline gradually towards 10½ per cent by the end of 2027.

Additional fiscal consolidation is needed to meet the government’s fiscal targets. The fiscal framework has set a balanced primary target for 2025, followed by surpluses of 0.25% and 0.5% in 2026 and 2027, respectively, with a tolerance band of 0.25 percentage points. The projections assume that these targets are met, but are subject to risks, as achieving this outcome depends on revenue measures still awaiting congressional approval, and the successful implementation of other consolidation measures. A recently approved income tax reform is designed to be revenue-neutral. Meanwhile, automatic indexation of social benefit spending and minimum spending requirements on other budget items continue to strain the budget and erode fiscal space, crowding out public investment. Gross public debt, currently at 77.7% of GDP, is projected to rise further, reflecting higher interest costs.

Growth will moderate

Economic growth is projected to ease on the back of by weaker domestic demand and a more challenging outlook for exports. Private consumption, boosted by rising wages and strong employment, will support domestic demand, but face headwinds from high inflation. After several years of robust expansion, private investment is expected to weaken due to elevated interest rates and increased uncertainty. Higher US tariffs will weigh on Brazilian exports, if maintained, though Brazil will benefit from strong agricultural output and rising food prices this year. Inflation is projected to be 5.1% in 2025, before declining to 4.2% in 2026 and 3.8% in 2027 as demand weakens.

The outlook is subject to several risks. Above-target inflation expectations harbour risks that could delay the start of monetary policy easing, slowing domestic demand. A failure to comply with fiscal targets could undermine confidence in medium-term fiscal prospects and dampen investment. Heightened global uncertainty and weaker demand from China would adversely affect Brazilian exports and growth prospects. On the upside, real income gains and easing financial conditions could lead to stronger than expected private consumption, and investment in sustainability-focused projects could exceed expectations amid recent policy efforts to promote blended-finance instruments.

Regulatory reforms would boost productivity growth

Structural fiscal reforms, including to public expenditure, are needed to help meet fiscal targets over the next few years, safeguard debt sustainability and strengthen confidence. The scope for raising the efficiency of public expenditures should be explored across a wide range of spending areas, including social benefits, while a systematic review of tax expenditures could also help to improve fiscal outcomes. Greater flexibility in public spending is needed to better align budget policy priorities with long-term investment needs. Lowering non-wage labour costs could help to reduce labour informality and provide better jobs, and improving access to early-childhood education and vocational education would improve labour market opportunities across different socio-economic groups. Similarly, strengthening active labour market policies and access to training would help to bridge the skills gap. Although past reforms have trimmed unnecessary bureaucracy, and the 2025 consumption-tax reform will reduce compliance costs for businesses, Brazil would benefit from further aligning regulatory policies affecting product markets and services to international best practices. Reducing regulatory burdens and licensing requirements would strengthen competition, foster innovation and boost productivity. This includes easing entry restrictions in professional services, notably for lawyers and accountants, and abolishing exclusive rights for certain ancillary tasks, which could lower the cost of doing business. Moreover, lowering existing trade barriers, including in the context of new bilateral trade agreements, could open new export opportunities, improve access to intermediate inputs and strengthen competitiveness. Reviewing non-tariff trade barriers, including local content requirements, could also strengthen global trade integration. Brazil has made significant progress in tackling climate-change challenges, including by reining in illegal deforestation over recent years, and building on this progress will be important to make growth more sustainable.