OECD Economic Outlook, Volume 2026 Issue 1

Real GDP growth is projected to slow to 1.6% in 2026, before rebounding to 2.1% in 2027. Exports will be the main driver of growth in 2026, supported by a strong commodity sector and robust demand from China. Private consumption will remain resilient amid favourable labour market conditions and rising disposable incomes. High interest rates will weigh on investment in 2026. Inflation is projected to ease gradually, despite the evolving conflict in the Middle East, reaching 4.4% in 2026 and 3.6% in 2027. Further increases in energy and fertiliser prices could weigh on growth and fuel inflation.

Ensuring long-term public debt sustainability will hinge on continued fiscal consolidation, improving the efficiency of public spending, while enhancing tax administration and revenue collection. Monetary policy is expected to ease gradually throughout 2026 and 2027 as inflationary pressures recede. Brazil has a remarkably clean energy matrix and low energy import dependency, but also further scope for scaling up investment in renewables such as wind and solar. Lowering regulatory barriers in network sectors and professional services could foster competition and bring productivity benefits to a wide range of downstream activities.

Economic activity stagnated in the second half of 2025, curbing annual 2025 GDP growth to 2.3%. High interest rates weighed on economic activity, with investment dropping by 3.5% quarter-on-quarter (non-annualised) in the last quarter. Recent indicators point to a modest recovery since early 2026. Industrial production has increased by 1.4% since November. Private consumption is showing positive signs, with monthly retail sales growing by 0.6% in February and 0.5% in March. The labour market remains resilient despite an uptick in unemployment to 6.1% in the first quarter. Real wages of workers rose at a rapid pace of 5.5% year-on-year in the first quarter of 2026.

After peaking at 5.5% in April 2025, headline inflation declined to 3.8% in February, before rising to 4.4% in April due to higher prices for transportation, food and beverages triggered by the evolving conflict in the Middle East. Petrol prices at the pump have risen by 8% while prices for diesel, which has a higher import share, rose by over 20% between February and April. Rising global urea prices also add to cost pressures as Brazil imports most of its fertilisers. At the same time, as a net oil exporter, Brazil increased its trade surplus in April. Goods exports rose by 14% in annual terms in April, boosted by exports from extractive industries.

The central bank initiated monetary easing in March amid moderating growth and easing inflation. The Selic policy rate was cut by 25 basis points in March and April to 14.5%, after being at 15% since June 2025. It is expected to decrease further to 13.25% at the end of 2026 and 10.75% at the end of 2027. However, uncertainty about the duration of the evolving conflict in the Middle East could affect the timing and magnitude of further cuts.

Meeting budget targets is becoming more challenging amid rising spending pressures. The 2025 budget outcomes complied with the zero-primary deficit target, staying within a tolerance band of 0.25 percentage points, after excluding certain court-ordered payments. Without this adjustment, the primary balance would have shown a deficit of 0.5%. Achieving the 2026 target depends on successful implementation of further consolidation measures. In March and April, the government introduced several energy support measures, including diesel subsidies for importers and producers which must be passed on to consumers, cooking gas subsidies, and federal tax exemptions on diesel, biodiesel and jet fuel used in civil aviation. In May, this was complemented by gasoline subsidies for producers and importers. These measures are financed by a temporary 12% export tax on crude oil, a 50% tax on diesel fuel exports and a higher levy on cigarettes, with the package designed to be fiscally neutral.

GDP growth is projected to slow to 1.6% in 2026 amid challenging global and domestic conditions, before rebounding to 2.1% in 2027. Exports will be the main driver of growth, supported by mining, robust agricultural output and strong demand from China. Lower effective tariffs on exports to the United States and implementation of the Mercosur-EU agreement should also provide an additional boost to exports. Private consumption will maintain momentum on the back of historically low unemployment and strong wage growth, and minimum wage increases and a higher basic allowance in personal income taxes will bolster disposable incomes in 2026. Investment will continue to be held back by elevated interest rates and global uncertainty before recovering in 2027. Inflation is projected to ease gradually, reaching 4.4% in 2026 and 3.6% in 2027, within the target range.

The outlook is subject to several risks. The evolving conflict in the Middle East could raise energy and fertiliser prices further, putting upward pressure on inflation and weighing on agricultural output. Similarly, exports could be affected by supply chain disruptions. Lasting support measures related to the energy price shock could increase the risk of fiscal slippage if offsetting measures fail to materialise. On the upside, stronger-than-expected agricultural production would boost exports, while faster disinflation would allow a faster pace of monetary easing, lifting domestic demand.

Ensuring long-term macroeconomic stability will require adherence to the fiscal framework to place public debt on a firmly declining path. This should be supported by containing the growth of mandatory spending, notably through reviewing indexation mechanisms and improving the targeting and efficiency of social programmes, including recent energy-support measures, while reducing tax expenditures and enhancing tax administration. Maintaining a tight monetary policy stance will remain essential to durably anchor inflation expectations and preserve policy space in the face of external shocks. Strengthening energy security and resilience calls for continued diversification of the energy mix beyond hydropower, including by scaling up investment in renewables such as wind and solar, expanding transmission infrastructure, and improving energy efficiency. Reducing regulatory barriers and enhancing competition in electricity and gas markets would help lower costs and attract more private investment to the sector. Economy-wide productivity is set to benefit from the gradual implementation of the consumption tax reform, which will simplify the tax system and reduce compliance costs. This could be complemented by regulatory reforms that lower barriers to entry in network sectors and professional services. Enhancing human capital through further improvements in the quality of education and an expansion of labour-market relevant vocational training would also support productivity. Reducing the labour tax wedge for low-income earners, particularly through lower social contributions, could allow more workers to join the formal labour market.