Brazil’s GDP Slowdown: Why This Is Considered Positive by Some Economists

Economists interviewed by BBC News Brazil see the recent slowdown as good news that could help adjust other current economic problems, such as high inflation expectations and rising interest rates.

“Going forward, we would be better off growing steadily at 2% or 2.5% a year in a sustainable way, but at low interest rates,” says Mansueto Almeida, chief economist at BTG Pactual.

The Brazilian economy has been growing at an accelerated pace since the end of the Covid pandemic. In 2021, growth reached 4.8% – at a time when the country was recovering from the strong contraction recorded at the beginning of the pandemic.

But in the following years, growth has remained strong – at 3% or higher since 2022.

Why was economic growth good at the time, but is now considered dangerous by some economists?

Almeida explains that the answer lies in unemployment.

“When we were in the pandemic, the unemployment rate was 14%. So there were a lot of unemployed people that needed to be brought into the job market. Not now. Now the unemployment rate is 5.4%,” he says.

This unemployment rate is what some economists call “full employment” – a situation in which almost everyone who wants to work can work.

For Rafaela Vitoria, chief economist at Banco Inter, Brazil’s low unemployment rate is “excellent news.”

But precisely in moments of full employment, accelerated economic growth can be harmful.

The acceleration of the economy means that companies need to hire more employees to cope with the increase in consumption. But the labor supply has already reached its limit – and there is no longer anywhere to bring workers from. As competition for workers increases, wages rise, leading to a general increase in costs and prices. The supply of goods and services in the economy cannot keep pace with the increase in consumption.

Vitoria explains that this general increase in prices in the economy is inflation – which can undo all the gains made by the population at a time of growth.

“Households enjoy prosperity in the short term, but in the medium and long term, inflation cancels out this improvement in purchasing power that households have gained,” he says.

To try to control all these variables, there are two main economic agents that operate independently of each other – the central bank and the federal government.

The central bank can speed up or slow down the pace of the economy through interest rate (monetary policy) – the higher the index, the slower the growth. The federal government can influence the economy through budgeting and public spending (fiscal policy).

Since 2024, the central bank has been trying to slow Brazil’s economic growth with “massive doses” of high interest rates, says Silvia Matos, coordinator of the Macro Bulletin of the Brazilian Institute of Economics of the Getulio Vargas Foundation (Ibre-FGV).

“The economy did not slow down in 2024. It just took much longer to slow down. The central bank said at the end of the year that it would raise interest rates three more times. That is very high in terms of the historical series and higher than anywhere else in the world.”

The current slowdown in GDP is a sign that this high interest policy is having the desired effect by the central bank, which needs to keep inflation below 4.5%, its target ceiling. Inflation expectations are finally starting to fall, and there is hope that interest rates will also start to fall in Brazil in 2026.

Rafaela Vitoria of Banco Inter says the Brazilian economy has taken a long time to slow because monetary and fiscal policies are moving in opposite directions.

While the federal government gave a fiscal boost to the economy, the central bank’s monetary policy tried to contain the acceleration through higher interest rates.

Mansueto Almeida draws an analogy: It is as if, while driving a car, the government presses on the accelerator, while the central bank presses on the brake at the same time.

“We have seen a general increase in spending. The government has approved the PEC transitional program, with additional spending of about R$200 billion in 2023, especially with the Bolsa Família programme, which has a budget of about R$70 billion,” Vitoria says.

“There has been a return to a policy of real growth in the minimum wage, which today unfortunately does not match our ability to supply. This real growth in the minimum wage affects Social Security benefits, especially pensions and retirement.”

“We are seeing average spending growing at 5% above the inflation rate, which is much higher than the theoretical ceiling of the fiscal framework, which was 2.5%,” Vitoria says. “This has boosted the economy beyond our capacity. That is why the inflationary impact is worrying.”

It stated that the government’s fiscal drive helped a lot in household consumption and allowed strong growth in the labor market, with a sharp decline in unemployment.

Data released by IBGE this week show that the number of people living in poverty in Brazil is the lowest in the past 12 years. In one year, between 2023 and 2024, about 8.6 million Brazilians moved out of the poverty line.

So what will happen from now on?

Economists interviewed by BBC News Brazil believe Brazil has reached a “soft landing” moment for the economy – where the slowdown is gradual and interest rates are allowed to fall.

This decline in interest rates is necessary to improve Brazil’s investment environment (companies are able to obtain cheaper loans and invest in increased productivity) and public debt environment (the federal government pays less interest on its debt, improving public accounts).

GDP data – like the one released on Thursday – are crucial to determining whether this decline will continue smoothly.

If GDP surprises in future releases with accelerating growth, it will be a sign that the “horse dose” of high interest rates mentioned by Matos is not working. It is then expected that the central bank will postpone the interest rate cut that everyone is waiting for today.

But for the following year, 2027, the three economists interviewed by BBC News Brasil believe there will be discussions about new fiscal adjustments to be made by the government of the candidate who wins the 2026 election.

“I am cautiously optimistic. I believe that with the growth of the economy and the current situation in the labor market, these are very positive points worth celebrating. It is possible for us to correct the course without generating an economic crisis, like the one we saw in 2015 and 2016, with high unemployment and recession,” said Raffaella Vitoria, from Banco Inter.

“It’s a glass half full. I’m optimistic about the current situation. But if we don’t correct the financial course, we may face a crisis soon.”

BTG Pactual’s Mansueto Almeida also welcomes the current level of growth, but warns of challenges.

“If Brazil can consistently achieve GDP growth of 2.5% per year, with inflation at the target level and low interest rates, this is a very good scenario, because 2.5% GDP growth means GDP per capita growth of 2% per year. But the biggest challenge is to slow down spending growth, reduce inflation, and create a growth scenario with low interest rates.”

Graphics by Lais Allegretti and Caroline Souza, from the visual journalism team at BBC News Brazil