Real GDP is projected to grow by 3.2% in 2024, 2.3% in 2025 and 1.9% in 2026. Persistent job creation and strong wage growth will drive household consumption through 2025. Following a strong pick-up in 2024, private investment will remain buoyant although slowing gradually. A slowdown in export market growth will limit export expansion. Inflation has picked up in the second half of 2024 but is expected to converge towards the 3.0% target by 2026, although at a slow pace.

Fiscal policy remains expansionary, and meeting the primary deficit target of at most 0.6% of GDP required by the new fiscal framework will be challenging in 2024 and 2025. Automatic backward-looking price indexation will maintain pressure on social expenditures in the next few years, requiring a further squeeze of discretionary spending in the absence of broader reforms. The outlook for inflation has deteriorated, and the ensuing monetary tightening is projected to continue until mid-2025. Broad-based structural reforms are needed to deliver stronger and sustained growth. As employment expands, developing access to early childhood education would facilitate labour market participation of women and reduce gender disparities.

The economy experienced strong growth in the first half of 2024. Leading indicators now point to a gradual moderation in the second half of the year. Services stagnated in July and August, having risen by 2.6% in the first half of the year, but rebounded by 1% in September. Retail trade rose by 5.1% in the first half of 2024 but remained broadly unchanged in July and August before increasing again in September by 0.5%. Industrial production has seen a similar pattern, with a strong expansion in early 2024 and weaker performance in July and August. Agricultural production is expected to decline by 5.5% in 2024 compared to an exceptionally strong 2023 due to excessive rainfall in the South of the country and a long period of drought from the North to the Southeast. The labour market remains robust, with the unemployment rate at 6.4% in September, down from nearly 15% in mid-2021. Labour shortages are appearing in sectors like construction and industry.

After decreasing in until May, inflation rose to over 4% from June to September, when it reached 4.4% and further strengthened in October to 4.8%. During that period, price inflation of food and beverages rose to 5.9% in September and 6.6% in October, reflecting the impacts of the drought on items such as meat, crops and milk. Prices of housing, utilities and transportation services also increased markedly. Core inflation has trended upward since March.

Disinflation has come to a halt, leading the Central Bank to increase the key policy rate by 25 percentage points in September and by 50 percentage points to 11.25% in November. The combination of strong GDP growth, a tight labour market, a fiscal expansion and a weaker currency is fuelling inflation expectations. Additional policy rate increases are expected as inflation continues to hover above the central bank’s target, bringing the policy rate to 11.75% in the first half of 2025. However, inflation is expected to ease in the second half of 2025, leading the way to monetary easing towards the end of 2025, with the policy rate dropping to 9.5% through 2026.

Fiscal policy expanded in 2024, resulting in a projected primary balance deficit of 0.6% of GDP in 2024. This is the maximum deficit allowed under the new fiscal rule. Planned revenue measures did not deliver the revenues expected, in particular the tax dispute settlements reform facilitated by the Brazilian Federal Tax Administrative Court (CARF). One-off receipts, such as higher dividends from the National Development Bank (BNDES) and royalties, will make up for the revenue shortfall. However, the absence of structural fiscal reform will make it more difficult to meet the fiscal target for 2025. Meanwhile, containing public spending is proving challenging. Pension outlays have risen faster than expected this year, prompting cuts to discretionary expenditures to comply with a spending cap. Indexation of social benefits and minimum spending rules in health care and education will maintain pressure on public finances. Gross public debt is set to continue rising and is projected to exceed 80% of GDP in 2025.

Growth is expected to ease from 3.2% in 2024 to 2.3% in 2025 and 1.9% in 2026. Robust household consumption, boosted by rising incomes and robust employment, will continue to drive domestic demand. Following a strong increase in 2024, investment will progressively slow over 2025 and 2026 as external demand softens. On the supply side, agricultural output is expected to fall short of last year’s record harvest amid less favourable weather conditions. Inflation is projected to average 4.5% for the year 2024, before decreasing again in 2025 to 4.2% and 3.6% in 2026. Upticks in inflation are conceivable over the projection period, including from climate shocks that affect food and beverage prices, and external factors impacting energy prices.

Inflation risks are tilted to the upside. Services inflation may prove more persistent than expected given strong growth and currency depreciation could have stronger effects on inflation. Also, unanchored inflation expectations could delay reductions in the policy rate. Risks affecting growth include policy uncertainty about fiscal slippage, which could hold back investment and confidence. Conversely, the successful implementation of the tax reform could enhance confidence and stimulate economic activity.

As the economy is growing above its potential, containing the current fiscal expansion is crucial for macroeconomic stability. Reforming automatic spending rules, notably in education and health, could provide more flexibility for fiscal policy to pursue policy priorities. Changing the indexation formula of public pensions and social benefits would limit their pressure on public finances. Expanding access to early childhood education, particularly for low-income households and single parents, can promote equal opportunities and facilitate greater female labour force participation and help to reduce labour shortages in certain sectors. Similarly, reallocating active labour market spending from employment subsidies to high-quality training in line with labour market needs would enhance labour matching. Lower non-wage labour costs and better skills could help to reduce labour informality and provide better jobs. Reducing regulatory burdens and licensing requirements, easing entry restrictions in professional services including by abolishing exclusive rights for certain ancillary tasks would improve the cost of doing business, boosting competition and productivity. The implementation of the unified value-added tax system adopted in December can do much to simplify the taxation of goods and services, reduce tax compliance costs for businesses and contribute to stronger confidence. It will also lower the cost of the consumption basket for low-income households.