OECD raises Brazil’s 2025 growth forecast but warns of slowing momentum

The OECD updated its forecast for Brazil’s economic performance in 2025, but cautioned that the country may experience weariness by 2026.On Tuesday, the organisation increased its expectations for Brazil’s GDP growth to 2.4% in 2025 and 1.7% in 2026, up from 2.1% and 1.6% in June, respectively.Combined with a bumper harvest in agriculture, which the OECD predicts will increase by 17%, the increased revisions in expectations are primarily due to expanded production capacity. Strong household consumption contributes to a positive mindset.Unemployment is hitting record lows at 5.6% and real incomes are up more than 3%as a continuously hot labour market backs spending. The OECD upheld these characteristics as having facilitatedthe preservation of economic activity during the majority of the year.However, momentum appears to be waning. The group reports that Brazil’s activity index has fallen 1.8% since April, indicating a cooling trend. Retail sales and industrial production both dipped in September, raising concerns about a slowdown. Business confidence has also dipped, implying that enterprises would be more cautious in 2025.The OECD cautions that investment is likely to slow in 2026. High interest rates, global uncertainty, and freshly imposed US tariffs on Brazilian exports are all projected to reduce capital creation. The impact of the US sanctions is now limited due to diverse export markets, but the organisation warns that dangers may build.Inflation pressures persist, keeping monetary policy tightInflation remains a central challenge. The OECD cut its 2025 projection for the Brazilian consumer price index (IPCA) to 5.1%, froman earlier estimate of 5.7%. That predicts inflation will slow to 4.2% in 2026 (downfrom an earlier 5% prediction) and to 3.8% in 2027. Despite the anticipated moderation, notably from electricity, food andthe services sector are keeping price pressures persistent.The organisation also notes that inflation expectations for 2026 and 2027 are still above the central target of 3%, indicating thatthe reality of disinflation is far from ensured. A very tight labour market, increasing wages,and an ongoing fiscal deficit are all converging to keep price dynamics high.In response, Brazil’s Central Bank has maintained a more hawkish position. Policymakers increased the Selic from 11.25% to 15% by the end of 2024. The OECD predicts that monetary easing will begin in 2026 and gradually decrease to approximately 10.5% by 2027. The analysis suggests that monetary policy may need to remain tight for an extended period due to persistent inflationary pressures.Fiscal challenges loom over the medium-term outlookAnother source of anxiety is the financial situation. The OECD classifies Brazil’s deficit as “significant” and warns that the government is at great danger of failing to meet its fiscal commitments. Gross public debt, which now stands at 77.7% of GDP, is expected to rise further. The organisation expects debt to climb to 80.1% in 2026 and 82.2% in 2027.These predictions represent a deterioration from June, when the OECD predicted worsening debt levels but at a slower pace. At the time, the institution projected debt to rise from 76.5% in 2024 to 78.2% in 2025 and 82.2% in 2026.The research emphasises that further budgetary reduction will be required to put debt on a sustainable path. Controlling obligatory spending is identified as a top goal. The OECD warns that failure to reach budgetary targets might increase uncertainty, damage confidence, and reduce investment.As Brazil enters a time of slower growth and tighter financial conditions, the OECD’s assessment highlights a delicate balancing task ahead. The country’s near-term prospects have improved, but the continuation of inflation, rising interest rates, and mounting fiscal pressures poses problems that will necessitate careful navigation in the coming years.The post OECD raises Brazil’s 2025 growth forecast but warns of slowing momentum appeared first on Invezz