Shifting outlook points to stronger GDP in 2026, weaker 2027

After a turbulent first half, the outlook now taking shape for Brazil’s economy in 2026 looks significantly different from what was expected six months ago—and that should have meaningful effects on the picture emerging for 2027. This year, GDP is likely to grow more than economists expected at the end of 2025, advancing close to 2%. Inflation will be higher, reaching slightly above 5%, while the Selic benchmark interest rate is expected to remain near 14%, well above the 12% to 12.5% projected last December. Oil drop gives little room for more Selic cuts Strong El Niño raises inflation, fiscal concerns in Brazil The impact of the Middle East conflict on oil prices pushed up fuel and food prices—in the latter case through freight and fertilizer costs—while fiscal stimulus has boosted demand, reducing room for rate cuts. Uncertainty over public accounts, in an environment of a very large nominal deficit, including interest expenses, and rising public debt, is also helping keep rates elevated. This combination of stronger growth, rising inflation, and higher rates in 2026 will have important consequences for projections of next year’s economic performance, even though those forecasts obviously remain highly uncertain. Banks and consulting firms have been cutting their GDP growth estimates for 2027, suggesting that whoever wins this year’s presidential election will take office with activity losing momentum. Bradesco, for instance, lowered its 2027 GDP growth forecast to 1.5% from 2%, while raising its estimate for this year to 2% from 1.8%. Consulting firm 4intelligence is working with an even lower number for next year, having cut its forecast last month to 1.2% from 1.6%. For 2026, 4intelligence also expects 2% growth, the same as Bradesco. Election-year stimulus Growth this year will be stronger than previously expected largely because of the government’s efforts to stimulate the economy in an election year. 4intelligence notes that several measures have had a “significant effect” on GDP growth in 2026, “including the broader income-tax exemption bracket, the release of extraordinary payments from the Workers’ Severance Fund (FGTS), and faster public investment by the federal government and subnational governments, especially states,” the consultancy said in a report. Because fiscal policy is unlikely to repeat “the substantial impulse it has been giving economic activity in this election year,” GDP is likely to slow sharply in 2027, 4intelligence said. In its revised outlook released last week, Bradesco also highlighted the impact of “strong stimulus measures that work against monetary policy” to explain its view of a stronger economy in 2026, which led the bank to raise its growth forecast to 2% from 1.8%. With fiscal policy expansionary, Brazil’s Central Bank has even more difficulty cutting interest rates—already a complicated task in a setting marked by pressure from fuel and food prices. Far from target With oil prospects improving after tensions between the U.S. and Iran eased, the inflation picture may be less unfavorable than feared a few weeks ago. Even so, forecasts still point to the National Consumer Price Index, or IPCA, ending this year between 5% and 5.5%, far from the 3% target pursued by the Central Bank. In addition, higher IPCA inflation this year contaminates next year’s index through inertia—the process by which past inflation feeds into future inflation. In 2027, economists expect the IPCA to remain above 4%. Interest rates will be higher than projected at the turn of the year. Bradesco still sees the Selic at 13.75% at the end of 2026, 50 basis points below its current level. 4intelligence, however, expects the benchmark rate to stay at 14.25% through year-end. As a result, “room for credit expansion tends to remain limited” next year, “in line with the expectation of a more conservative monetary-policy stance,” the consultancy said. That is another reason for weaker economic growth in 2027, even though 4intelligence raised its forecast for real income-mass growth to 3.5% from 2.7%, reflecting the strength of the labor market. The point is that, in addition to the effect of high rates on credit, “a process of household financial deleveraging will be underway,” the consultancy said. In its view, “given a historically high level of indebtedness, a significant share of the increase in income will be directed toward debt repayment, at the expense of consumption.” Fiscal adjustment The slowdown in activity in 2027 should reduce demand pressure on prices, which could help create room for a somewhat deeper interest-rate cutting cycle as the year progresses. However, for the Selic to fall to lower levels—something urgent in a country where many companies and households are indebted and the public sector faces extremely heavy financial expenses—the president elected this year will need to truly confront the imbalance in public accounts, with an adjustment focused on spending. If that happens, government stimulus to the economy would decline and Brazil’s fiscal-risk perception would improve. It will not be easy politically, but it is essential for the Selic and long-term interest rates to fall further and for the currency to strengthen, helping to bring inflation under control.