According to the Brazilian Institute of Geography and Statistics, Brazilian GDP rose by 0.1% between the second and third quarters of 2025, already discounting seasonality. In other words, economic activity as a whole was practically stagnant. This happened after a not very strong performance in the second quarter, when the expansion in the same type of comparison was 0.3% (1.3% y/y). In the January-March period, the expansion was 1.5% (more than 6% annually).
Given the extreme fluctuations in agricultural GDP and the strong acceleration in oil and natural gas extraction this year – sectors that depend on supply conditions much more than on demand – it seems more appropriate to try to analyze the dynamics of Brazilian GDP excluding these sectors, whose weight is just over 9% of GDP. With this exclusion, the sequence of seasonally adjusted changes in Brazilian GDP was as follows: +0.5% in the first quarter; +0.3% in the second and almost zero in the third.
It is therefore clear that the Brazilian economy registered a significant slowdown in recent quarters, which should have continued in the fourth quarter. This is consistent with the fiscal contraction in spending observed in the first half of the year, which I covered in detail in a previous column. It also reflects the strong contractionary stance of monetary policy, in a context in which the Selec rate rose from 10.5% per annum in mid-2024 (a level that was already constrained, above neutral interest) to 15% in the middle of this year, a level that remains in effect.
This slowdown must have meant that the Brazilian economy was no longer in the mode of moderate activity observed a few quarters ago. The SPE (Secretariat for Economic Policy), linked to the Ministry of Finance, this week published a new methodology for estimating the so-called potential GDP. According to them, the Brazilian economy has been operating at a level above its potential since 2024, including in the second quarter of this year (that is, the so-called output gap was positive). As GDP evolves in the third and fourth quarters, this gap is likely to approach zero by the end of 2025.
Thus, today the Brazilian economy finds itself in a situation that economists call “full employment.” This means that economic activity is neither inflationary nor deflationary. For this neutral effect on inflation to persist from now on, the economy must grow in line with potential growth.
What is this potential growth? SPE has indicated an estimate of 2.6% per year currently. In my estimation, this value should converge to around 2% in 2026 and 2027, as the strong decline in structural unemployment (from around 10% of the labor force a few years ago to 7% now) seems unlikely to continue, in a context where the effects of the 2017 labor reform appear to have fully consolidated and where worker expansion through apps is losing some momentum.
In the future, especially from 2030 onwards, the effects of the indirect tax reform approved at the end of 2023 (EC 132/2023) should provide some additional strength, perhaps adding between 0.5 and 1.0 percentage points to our potential growth, through accelerating productivity gains and investments in fixed assets. This should help offset the increasingly unfavorable effects of demographics on our potential GDP, in a context where the “demographic bonus” – the situation where the growth of the working-age population is greater than the total population – is already in the past, having ended in 2018/19.
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