OECD Economic Outlook, Volume 2024 Issue 1

Brazil

Real GDP is projected to grow by 1.9% in 2024 and 2.1% in 2025. Buoyed by robust employment growth, minimum wage increases and diminishing inflation, household spending is expected to be the main engine of growth, particularly in 2024. Despite recent signs of a rebound, continued external uncertainty will keep private investment subdued throughout 2024. Inflation, which declined continuously throughout 2023, is projected to continue to converge towards the target during 2024 and 2025.

Monetary policy easing is expected to continue throughout 2024 amid declining inflation. Fiscal policy remains supportive but is set to consolidate in 2024 to achieve the primary target required by the new fiscal framework. The recently approved value-added tax reform has the potential to boost firm productivity and potential growth. Additionally, the planned establishment of a national carbon market can play a pivotal role in curbing deforestation, including in the Cerrado savannah, home to 45% of Brazilian agriculture and livestock farming. Better access to early childhood education would facilitate labour market participation for women and reduce gender disparities.

Economic activity is picking up slowly

The economy experienced a significant deceleration in the second half of 2023 from robust growth earlier in the year. Leading indicators indicate a gradual rebound in the first half of 2024. Retail trade rebounded sharply in January and February, influenced by lower inflation and improvements in credit and job markets. The services sector experienced significant growth in January helped by government payments of judicial orders, but was negatively influenced by the transportation sector in February. Industrial production contracted in January and February and still falls short of pre-pandemic levels. Agricultural production is expected to decline by 2.8% compared to an exceptionally strong 2023 due to excessive rainfall in the South of the country and periods of drought with high temperatures in the North and Centre-West. Despite this, the labour market remains robust, with the unemployment rate at 7.6% in February, down from nearly 15% in mid-2021, while employment and the wage bill are both rising.

Brazil: Labour market and confidence indicators

Source: IBGE; and CEIC.

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Brazil: Demand, output and prices

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Inflation was 3.9% in March, down from 4.5% in January. Inflation slowed primarily for housing, household furniture and notably for education. Price increases for food, beverages and transport are now slowing, after climate events put pressure on food and beverage prices in the latter part of 2023. The overall trend indicates a likely further decline in inflation over the year. Core inflation is decreasing, reaching 4.3% in March, down from 5.1% in January.

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 115 database; and Banco Central do Brasil.

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Fiscal policy is struggling to meet consolidation targets

With inflation continuing to decline, the Central Bank has eased monetary policy, lowering the policy rate from 13.75% in July 2023 to 10.75% in March 2024. As inflation decreases further, additional policy rate cuts are expected, reducing the rate to 8.75% by the end of 2024 and 8.25% by the latter half of 2025. However, the pace of rate cuts may be affected by external developments and fiscal slippages, which could affect the exchange rate and inflation dynamics.

Fiscal policy expanded in 2023, leading to a deterioration in the primary balance from a surplus of 0.5% of GDP in 2022 to a deficit of 2.1% of GDP in 2023. The new fiscal framework mandates a balanced primary budget in 2024. Uncertainty regarding the amount that newly implemented tax measures will raise and spending pressures in health care and education may cast doubt on the ability to meet the fiscal target for 2024. Gross public debt is set to rise slightly, as even a balanced primary budget would fall short of stabilising the debt level at the current 75% of GDP.

Growth will pick up

Growth will rise to 1.9% in 2024 and 2.1% in 2025, with domestic demand as the main driver. Investment is expected to improve as financial conditions ease and business confidence strengthens. Household consumption is poised to remain robust, supported by an increasing wage bill and stronger job creation. On the supply side, agricultural output is expected to fall short of last year’s record harvest amid less favourable weather conditions. Inflation, which averaged 4.6% in 2023, is projected to decrease to 4.0% in 2024 and 3.3% in 2025, converging to the 3% target in 2025. As some of the temporary drivers of inflation have already receded, the pace of disinflation is now expected to slow, with temporary upticks in inflation not ruled out, including due to developments in agriculture that affect food and beverage prices.

Economic risks are tilted to the downside. Geopolitical tensions and slower growth in China, a key trading partner of Brazil, could dampen external demand. A worsening fiscal balance could add to inflationary pressures and delay further reductions in the policy rate, thereby holding back investment and consumption. Conversely, successful implementation of the tax reform could enhance confidence and stimulate economic activity.

Fiscal consolidation is needed to restore confidence

The key to restoring confidence in the public finances lies in meeting the primary balance target and implementing the new fiscal framework. The unified value-added tax system adopted in December will simplify the taxation of goods and services, reduce tax compliance costs of businesses and contribute to stronger confidence. It will also lower the cost of the consumption basket for low-income households. A broader fiscal policy reform would help to create fiscal space and enhance debt sustainability. On the spending side, reforming automatic spending rules could provide more flexibility for fiscal policy to pursue policy priorities. On the revenue side, the progressivity of income taxes could be strengthened by limiting the deductibility of private health and education expenses and reducing tax loopholes. Expanding access to early childhood education, particularly for low-income households and single parents, can promote equal opportunities and facilitate greater female labour force participation. Similarly, reallocating active labour market spending from employment subsidies to high-quality training in line with labour market needs would enhance labour matching. Access to foreign markets and deeper integration into global value chains could be facilitated by lowering trade barriers. Import tariffs and non-tariff barriers, including widespread local content requirements, could be reduced further. Addressing infrastructure gaps in transport, water and sanitation would improve the competitiveness of Brazilian firms and improve access to basic services for more of the population. Stronger enforcement of environmental protection laws including the Forest Code will be crucial to combat deforestation. Tying subsidised agricultural credit to the use of low‑carbon practices could help to combat deforestation and reduce emissions.