OECD Economic Outlook, Volume 2023 Issue 1

Brazil

Economic activity is slowing due to weaker private consumption and exports. Real GDP is projected to grow by 1.7% in 2023 and 1.2% in 2024. Lower employment growth, still high inflation and tighter credit conditions will limit household spending capacity despite higher social transfers. Private investment will continue to rise but at a slower pace. Exports will be affected by lower commodity prices and subdued global demand. Inflation has declined markedly over 2022 but will remain above the target band during 2023.

Monetary policy is expected to remain restrictive, with the policy rate staying at 13.75% until at least the third quarter of 2023, after which room for monetary easing may emerge. Fiscal policy remains expansionary for now, but gradual consolidation should start in 2024. Implementing a credible medium‑term fiscal framework will help to restore confidence and achieve a more consistent macro‑economic policy mix. Better managing public infrastructure investment, simplifying indirect taxes and more effective social transfers could boost potential growth and social inclusion while improving public finances. Stronger sustainability incentives for the agricultural sector and an end to illegal deforestation would make growth more sustainable.

Economic activity rebounded in the first quarter

Economic activity increased by 2% in the first quarter of 2023, supported by services and a large expansion of agricultural production. Retail sales grew by 3.8% in January 2023, including in some sectors that had been in decline for months, such as clothing and footwear, or food and beverages. Agricultural production is expected to reach a new record in 2023, driven by favourable weather conditions on average. This has more than offset localised drought‑related declines in agricultural production in the south of the country. However, industrial production continues to stagnate and is still 2.2% below pre‑pandemic levels, owing to weak demand and supply constraints for raw materials, electronic components, and other inputs. Investment declined by 3.4% in the first quarter of 2023 on the back of rising financing costs. Job creation also dropped, contributing to a slight increase in unemployment.

Brazil: Activity and labour market indicators

Source: IBGE; and Banco Central do Brasil.

Statlink

Brazil: Demand, output and prices

Statlink

Brazil: Inflation and fiscal indicators

1. Core inflation excludes energy and food products. The shaded area corresponds to the inflation tolerance band.

Source: OECD Economic Outlook 113 database; and Banco Central do Brasil.

Statlink

Annual inflation fell to 4.2% in April 2023, down from 5.6% in February. Broad‑based declines in inflation across sectors outweighed stronger increases in electricity and gasoline prices, which were partly related to the withdrawal of temporary tax exemptions on energy. Steadily declining core inflation measures, both for goods and services, confirm that gradual disinflation is underway.

Monetary policy will remain restrictive in the near term

Despite recent declines, inflation will remain significantly above the 1.75‑3.75% target band in 2023 and the central bank is expected to maintain the policy rate at 13.75% until the third quarter of 2023. Moreover, higher rates in advanced countries are still exercising pressures on the exchange rate. Starting from late 2023, policy rates are expected to be gradually reduced, reaching 10% by the end of 2024.

Fiscal policy will remain expansionary in 2023, in line with a fiscal package voted in December that exempts new social measures from the current expenditure ceiling. The measures include maintaining a 50% increase in conditional cash transfer benefits on a permanent basis and wage increases for civil servants. However, tax exemptions for fuel have been partially withdrawn. The government has proposed a new fiscal framework intended to contain public spending growth while maintaining some flexibility with respect to investment outlays, with annual targets for the primary fiscal deficit. The framework also contains provisions to enhance the efficiency of tax collection and integrate regular spending reviews into the budgeting process to increase the effectiveness of public spending.

Growth will remain moderate

Despite an expansionary fiscal policy, GDP growth is projected to slow to 1.7% in 2023 and 1.2% in 2024, driven by lower domestic demand growth. Household consumption and investment will continue to slow over 2023 as tighter monetary conditions gradually raise lending rates. On the supply side, a record agricultural harvest will provide a visible boost to GDP growth, while the services sector is continuing to rebound from the pandemic shock. As external demand for Brazil’s exports is expected to be modest and commodity prices have fallen, net exports will not be able to contribute much to growth. Diminishing credit to the economy and slightly higher unemployment will reduce household disposable incomes and contribute to lower inflation, which is expected to decrease to 5.6% in 2023 and 4.7% in 2024, down from an annual average of 9.3% in 2022.

Risks to economic activity are balanced. On the upside, stronger growth in China, Brazil’s main trading partner, could boost exports, while the successful implementation of the new fiscal framework could lift confidence in the public finances and sustain stronger investment. A successful adoption of the tax reform in 2023 would raise productivity, and these effects could turn out stronger than expected. On the downside, a failure to implement key reform plans such as the tax reform or the new fiscal framework could erode confidence, leading to lower growth. Moreover, a slower decrease in inflation would delay policy rate reductions, which would lower investment and consumption. Further increases in advanced economies’ policy rates would add to pressures on the exchange rate.

Adopting the fiscal framework and tax reforms is key to boost confidence and control debt

Reforming the complex system of taxing goods and services would drastically reduce the current high administrative burdens on firms and has strong long-term potential to boost productivity and growth, which is particularly important at a time when population growth is declining. Further progress on addressing large infrastructure gaps in transport, water and sanitation would reinforce these effects. These reforms would also boost the competitiveness of Brazilian firms, allowing them to reap greater benefits from international trade. Continued efforts to harness Brazil’s strong potential in the generation of electricity from renewable sources would make growth more sustainable. This could be supported by rapid progress in reining in illegal deforestation and better sustainability incentives for the agricultural sector. For instance, increasingly shifting current directed lending programmes for agriculture towards low‑carbon practices would help to mitigate carbon emissions and soil degradation. This could build on existing pilot programmes that have successfully strengthened incentives for the recovery of degraded pastures, no-tillage practices, fixation of nitrogen, crop-livestock-forestry integration, expanding the treatment of animal waste, and planted forest. Recently increased benefit levels for conditional cash transfers are well‑targeted to those most in need and will reduce poverty and inequality. At the same time, further efforts to strengthen the effectiveness of other social benefits and improve their targeting to low-income households would allow more rapid social progress. Further expanding access to early childhood education, especially for low-income households, could improve equalities of opportunity and allow more women to join the labour market.