Brazil in perspective
Brazil is the largest economy amongst South and Latin American countries, and it is positioned as one of the top 10 economies in the world – ranked 9th in 2023, with a GDP of US$ 2.17 trillion. Its territory of 8.51 million km2 represents 48% of South America area. Its 203 million inhabitants make Brazil the 6th most populated country in the world, representing a meaningful consumer market.
The economic environment has been under substantial transformation since the 1990s. Relevant economic reforms were adopted between 1990 and 2000: Plan Real (which ended the hyperinflation era) and the inflation target, floating FX regime, fiscal responsibility law and the privatizations programs and concessions of public services, supporting an increase in the productivity rate as well in the potential growth rate.
Since 2016, a renewed set of economic reforms were implemented, focused in two main areas: 1) upgrade business environment; and 2) improve allocation in the public sector. The following table summarizes some of them.
Table 1 – Some of the economic reforms adopted since 2016
| Macroeconomics and Public Sector | Business Environment |
| Update in the Fiscal Rules | Economic Freedom Law |
| Labor Reform | Contract Annulment Law |
| Revision of the FX Rules | New Bankruptcy Law |
| Central Bank Autonomy | Collateral and Securitization Law |
| Tax Reform | Credit Score |
| Trade Agreements | PIX |
| New Procurement Rules for the Public Sector | New Sanitation Law |
| State-owned Governance Law | New Railway Law |
| Substitution of the TJLP for the TLP | Coast Navigation Law |
Source: Federal Government, National Congress e media.
Besides, there are innovations, such as the PIX, the Central Bank digital currency (DREX), and the Open Finance, pursuing decrease in the transaction costs. These group of initiatives is expected to support a lowering “Custo Brasil” (as it is known the costs of doing business in Brazil) and increase competitiveness. It is expected to support an increase in the potential growth rate as well. Some preliminary estimates indicate the potential growth rate increased by 1.0 percentage point over the average growth rate of 1.4% observed in the 2017-2019 period. The IMF released in July 2024 its Article IV Consultation with Brazil report, citing a revision in the medium-term growth rate from 2.0% to 2.5%, due to the reforms and the potential opportunities for renewable energy and oil & gas field.
Short-term economic outlook
Brazilian economy has proved solid, and it has been surprising on the upside since 2021, with an average growth rate of 3.6% in the 2021-2023 period. Some segments posted stronger growth compared to the GDP, as the case of agriculture (4.7%), electricity, gas and sanitation (6.2%), construction (6.3%), technology and communication (7.2%) and other services (7.7%).
This sound performance suggests that the economic boom was pushed by the supply side, reflecting the implementation of the economic reforms in the past years. From a demand point of view, exports have surprised, with an average growth rate of 6.4% while private (3.4%) and government (2.7%) consumption run below GDP growth rate in the period.
The growth rate of exports and imports (average 4.5% in the 2021-2023 period) also reflects an additional openness of the economy – between 2013 and 2023, international merchandise trading, measured as the sum of exports and imports as a percentage of GDP, rose from 19.2% to 26.7%, due to the trade agreements. Furthermore, Brazil has been able to strengthen its capacity of being a global supplier of grains, iron ore and oil and gas.
The strong economy coupled with the new and up to dated labor legislation has supported a downward trend in the unemployment rate, which declined from 14.9% in the 1st quarter of 2021 (the highest rate as of the global covid-19 pandemic) to 6.9% in the 2nd quarter of 2024 (a little above the lowest ever 6.3% level in the 4th quarter of 2013). The employed population reached over 101 million people and combined with the recovery in the individual real income, it was observed an increase in the salary mass, which reached the record level of R$ 321 billion.
Despite the strong economic performance, inflation rate measured by the consumer price index (IPCA) have slowed after the expressive increase in the 2021-2022 period, on the back of the collapse in the supply chain caused by the pandemic and the Russia-Ukraine war. The annual IPCA declined from 12.13% in April 2022 to 4.23% in June 2024, going back to the inflation target range (between 1.5% to 4.5%). The annual wholesale prices, measured by the IGP-M, fell from 37.04% in May 2021 to 2.45% in June 2024 (in between, it reached a deflation of -7.72% in July 2023). The disinflation supported an easing monetary policy cycle and the Selic rate, which climbed from 2.00% in February 2021 to 13.75% in August 2022 (remaining at this level through 12 months in a row) was lowered to 10.50% in May 2024.
In the short-term, the disinflationary cycle has faced some constraints. International oil prices have fluctuated around US$ 80 per barrel as of an escalating geopolitical tension. Besides, the two largest economies in the world have performed divergently. The US economy has proved more resilient than expected, with a strong labor market and a consequent postponement of the easing monetary policy by the Federal Reserve, which has sustained a strong US dollar. Meanwhile, the weaknesses of the Chinese economy have been weighing iron ore prices, risking Brazilian trade surplus should narrow somewhat. Both events in the direction of a weak Real.
Moreover, local uncertainties have added pressure toward a devalued local currency. Central government expenditures, on a 12-month basis, jumped from 18.0% of GDP in December 2022 to 20.4% of GDP in June 2024, as the “Transition Amendment” (increased mandatory expenses) and the replacement of the Expenditure Ceiling Law (approved in 2016) to the new Fiscal framework have permitted an increase in the total expenditures.
In April 2024, government announced a change in the fiscal target for 2025, from a primary surplus of 0.5% of GDP to 0% of GDP, feeding doubts about the commitment of the government in avoiding an escalating public indebtedness. The depreciation of the Real in 2024 (year to June 2024) was around 13.2%, making it the most devalued currency among emerging economies. This strong depreciation has increased the risk Central Bank may resume tightening monetary policy to avoid further increases in the inflation rate.
Challenges ahead
The structural economic reforms implemented since 2016 have paved the way for a solid economic growth in the medium-term, which may be close to 2.5% per year. Nonetheless, some challenges remain in the horizon, some of which will need to be addressed in the short-term.
The greatest challenge is in regulating and implementing the tax reform approved in 2023, while it is necessary to revise the criteria for the government budgetary law. The potential outcome of an eventual failure in this effort is a higher tax burden, far above the affordability of the taxpayers, or an escalating public indebtedness. In both cases, it will drain resources from the private sector to the public sector, restricting the growth perspective.
Authors: Frederido Turolla
Pezco Economics
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