BRAZIL

In the 2000s, Brazil witnessed robust GDP growth, averaging an annual rate of +3.9%. However, leading up to the pandemic, the country grappled with a fragile growth and fiscal outlook, stemming from ongoing recovery efforts following the severe recession of 2015-2016. Consequently, Brazil registered an average GDP growth of merely +0.3% over the decade from 2011 to 2020. Despite this initial setback, Brazil saw a rapid recovery from the pandemic, buoyed by fiscal measures, the reopening of the services sector and favorable commodity prices. Real GDP expanded by +5.0% in 2021. However, the pace of growth has been moderating, with a slowdown to +3.0% in 2022 and +2.9% in 2023.
 
Looking ahead, Brazil’s economic trajectory will be shaped by a combination of factors. Strong agricultural performance and income, alongside a robust labor market, provided tailwinds in 2023. Consumer spending remains a key driver of Brazil's economic momentum, fueled by a strong consumer base and a relatively tight labor market. Real consumer spending grew by +1.1% over the third quarter of 2023, supported by a surge in motor vehicle sales and falling interest rates. However, the potential for inflationary pressures looms amidst robust wage growth and lingering services inflation. After reaching 4.6% in 2023, inflation is expected to keep gradually decelerating and converging to the target of 3% by 2025. As inflationary pressures in Brazil have eased, the Central Bank of Brazil (BCB) began a monetary easing cycle in August 2023. We expect interest rate cuts to persist until the second half of 2024 before a projected pause at 9.75%. Consequently, we estimate Brazil’s GDP growth to reach +2.0% in 2024. In the medium term, growth is expected to average around +2% from 2025 to 2028, with the potential for an upward bias if the country stays on track with significant reforms aimed at boosting productivity.

Luiz Inácio Lula da Silva, a left­wing former president (2003-2010), defeated the far-right incumbent Jair Bolsonaro by a tiny margin to win the election in October 2022. The start of his four-year mandate at the beginning of 2023 improved short-term political stability, but the transfer of power did not go smoothly. Facing stiff opposition from right-wing parties that have a stronger legislative presence, Lula’s pursuit of a more fiscally expansionary and less market-oriented economic policy will be not easy to achieve. Recent reforms, including a historic tax reform in 2023, aim to simplify Brazil's tax regime and foster efficiency gains. However, the macroeconomic benefits may take time to materialize. Brazil's export sector continues to defy expectations for a slowdown, driven by robust demand for natural resources, particularly from China.
 
With his commitment to improving the illegal deforestation and mining situation in the Amazon rainforest, Lula is also expected to bring positive changes in environmental policy. Our proprietary Environmental Sustainability Index puts Brazil at rank 64 out of 210 economies. In terms of the overall business environment, The Heritage Foundation’s Index of Economic Freedom survey 2021 ranks Brazil 146 out of 184 economies, recognized as a “Mostly Unfree” country. Monetary freedom is relatively good, but its fiscal health is among the world’s worst. Meanwhile, its rank in the World Bank Institute’s annual Worldwide Governance Indicators has declined during the past decade due to its poor political stability and control of corruption.