For the third consecutive year, Brazil’s economy is set to grow at a rate of 3% or more – an impressive outcome for an economy facing stagnant productivity and a low rate of potential output. Structural factors, such as past reforms, particularly in labor markets and education, may be yielding results. The proportion of workers with university degrees is at an all-time high, formal sector employment continues to expand, and the unemployment rate is near its historical low. Other labor market indicators, such as underemployment, reflect similar or even greater strength, as do the gains in real disposable income. Growth is being driven by increases in real consumption and a rise in capital expenditure. While external factors fueled growth in 2023, this year’s expansion is led by domestic demand – although this shift presents its own challenges.

Much of the current growth stems from cyclical forces, particularly fiscal stimulus. The rise in public spending is contributing to the increase in public debt that could reach 85% of GDP by 2026 – one of the highest in EM and, notwithstanding the recent rating upgrade by Moody’s, with dynamics resembling the problematic years of the Dilma administration (2014–18). Primary fiscal deficits are expected not only this year (close to 1% of GDP), but also in 2025 and 2026. The nominal fiscal deficit, near 10% of GDP, is certainly unsustainable. With inflation at 4.3% and expectations above target, the Central Bank has embarked on another tightening cycle, and the policy interest rate could reach 12.0%, according to market expectations.

Over the last quarter-century, from a macroeconomic perspective, Brazil has successfully established stable monetary and exchange rate regimes, which have supported growth. However, the country has yet to implement a sustainable fiscal regime, which continues to be a source of instability.

A distinguished panel of analysts explored these and other key issues shaping Brazil’s economic outlook in the coming months.