Brazil economic outlook, August 2025
Brazil faces slow growth prospects due to high inflation and budget risks, but easing inflation and stronger China and EU trade may offset US tariff impacts
The Brazilian economy rebounded strongly in the first quarter, with real GDP growing 5.7% on an annualized basis from the previous quarter.1 This is up from just 0.2% growth in the fourth quarter of 2024. Despite the strong start to the year, economic growth is expected to slow, with higher interest rates likely to begin restraining activity. The labor market is showing nascent signs of easing, which should take some wind out of consumers’ sails. In addition, rising trade barriers in the United States may also present a downside risk to the outlook. However, once inflation comes back to the central bank’s target, monetary easing can begin again, ushering in stronger growth. Unfortunately, that is unlikely to happen this year.
Since the first quarter of this year, it has become clear that the economy is slowing down. The central bank’s proxy for GDP growth—the IBC-Br economic activity index—contracted 0.8% between April and June 2025.2 The July purchasing manager’s index for services and manufacturing indicated that both sectors were contracting over the month.3
Consumer spending has been a clear engine of growth over the last year and a half. In the first quarter of 2025, consumption increased by an annualized 4.2% from the previous quarter in inflation-adjusted terms.4 Despite the strong quarterly performance, consumer spending was up just 2.6% from a year earlier—a marked slowdown compared to the 5.4% year-over-year growth seen in the third quarter of 2024.5
The slowdown in consumer spending has become more pronounced since the first quarter. For example, retail sales declined in April, May, and June on a month-to-month basis, after adjusting for inflation. That brings retail sales to just 1.7% growth on a year-ago basis—down from 3.8% in March.6 The two main measures of consumer confidence fell by 7.1% and 14.8% from a year earlier in July.7 Consumer expectations for the future were particularly weak, suggesting further restraint in spending.
Consumers have benefited from a strong labor market. The unemployment rate dropped to just 5.8% in June—the lowest reading since at least March 2012. The falling unemployment rate comes despite ongoing increases in the labor force participation rate, which jumped from 62.2% in January to 62.5% in June.8
Despite the general strength of the labor market, there are some signs that it is beginning to cool. Private sector employment grew by 3.6% from a year earlier in January but slid to 2.7% growth in June. Wage growth has moved sideways, rising a lofty 8.9% from a year earlier in June. However, rising inflation has eroded purchasing power more quickly. Real wage growth rose 3.3% in June—down from 3.9% in March.9
Inflation is yet to come down in Brazil
Higher inflation has come with higher interest rates for the Brazilian economy, which is also squeezing consumer spending in the country. The debt-service ratio—the share of after-tax income that is used to pay debts—stood at 27.6% in June 2025. The ratio has been increasing since early 2024, and the central bank has raised rates in an effort to combat elevated inflation. The debt-service ratio is also notably higher than it was prior to the pandemic: in 2019, it averaged just 23.9%.10
Brazil’s central bank has found it difficult to get inflation back within its target range of 1.5% and 4.5%. Indeed, inflation was 5.2% year over year in July (figure 1). However, rapidly weakening food inflation has prevented stronger overall price increases. The cost of food consumed at home fell by 1.9% in July from the previous month on an annualized basis. This is down from the double-digit growth seen as recently as March 2025.11
After excluding food at home and supervised prices, core inflation was 4.9% in July on a year-ago basis. Although this is still an elevated rate of inflation, it is the lowest reading since February, suggesting that core inflation is at least beginning to stabilize after a year of acceleration.12 This should give the central bank some room to keep rates steady after raising its policy rate to 15% in June—a 450-basis-point gain over the last year.13
In addition to raising debt-service costs to consumers, higher rates also pose a challenge to the government budget. Although the debt-to-GDP ratio fell at the end of last year, it has since begun to climb steadily, reaching 76.6% in June.14 Although the Brazilian government ran a primary surplus—excluding interest payments—in the first quarter of this year, the primary balance has since returned to a deficit as spending grew and revenue declined.
Maintaining a primary surplus is key to stabilizing debt-to-GDP ratios, but this has proven difficult to achieve. One example is the financial transactions tax that was blocked by Congress. Much of the initial tax was reinstated by the Supreme Court, but political opposition and negative reactions from financial markets caused the government to roll back some of the taxes.15 This could cause the government to freeze spending this year to remain within its fiscal framework. This comes after more than 30 billion reais worth of spending was already frozen in May.
An unsustainable debt would normally cause longer-term interest rates to rise. However, despite a higher policy rate from the central bank, longer-term yields have come down a bit recently. For example, the 10-year Treasury bond yield averaged 14.6% in February but had fallen to 13.7% by July. It ended the week of August 22 at 13.5%.16 Fortunately, investors are now factoring in lower inflation and a lower policy rate in their expectations, giving a modest reprieve to the government’s interest expense.
Trade barriers are a downside risk
Despite running a trade surplus with Brazil, the United States implemented a 50% tariff. As of this writing, it remains unclear whether the additional 10% tariff on all BRICS-aligned nations would be included, thereby increasing the total tariff burden on Brazilian exports to a staggering 60% across all goods.
Compared to other Latin American countries, Brazil is relatively insulated from the effects of US tariffs. Exports to China accounted for 28% of total exports, while only 12% went to the United States in 2024. Still, it exported roughly US$40 billion to the United States in 2024—about 1.8% of GDP—which leaves major sectors in Brazil vulnerable to US trade policy.17
The US administration has also imposed tariffs on specific goods. This includes a 50% tariff on steel imports, “without exceptions or exemptions.” As a result, the quota system that previously allocated a volume of tariff-exempt Brazilian steel exports to the United States is no longer in effect. Tariffs are also in place for autos, auto parts, and critical materials. Other goods are likely to be added to the list soon. These commodity-specific tariffs could affect more than US$7 billion of Brazil’s exports.
For example, Brazil exported approximately US$4 billion in steel to the United States in 2024, representing about 10% of Brazil’s total US-bound exports. Brazil also exported over US$2.2 billion in automotive-related goods to the United States and Mexico in 2024, making it vulnerable to a tariff-induced reduction of demand in the integrated North American market. Another US$1.6 billion of wood products were exported to the United States last year. Lumber and timber could potentially face higher tariffs, as they are currently under investigation in the United States.
Despite the rising trade barriers, Brazilian exports to the United States in the first half of the year were up 4% from a year earlier (figure 2). Some of this growth is likely due to US importers front-loading Brazilian goods in anticipation of tariffs. As Brazilian-specific US tariffs took effect in early August, their impact will likely become clearer in the months ahead. However, there have already been sizable product exemptions for Brazilian goods that amount to nearly half of all its exports to the United States.18 This should soften the negative impact to Brazilian exports.
With trade barriers rising in the United States, Brazil is deepening its relationships with its other major trade partners, including the European Union and China. For example, as a founding member of Mercosur, a South American regional trade bloc, Brazil has been instrumental in working towards the EU-Mercosur free trade agreement. The core trade provisions are expected to be ratified by late 2025 or early 2026.
President Lula and Chinese President Xi Jinping reaffirmed their shared commitment to enhancing the representation of the global south in a multipolar world in May. This year’s BRICS summit included a proposal for a new institution to facilitate investment for developing countries. Despite the relatively strong ties between the two countries, Brazil’s exports to China fell nearly 8% in the first half of this year when compared to the same period in 2024. China’s weak domestic demand and strong manufacturing incentives are likely weighing on its demand for foreign goods.
Brazil’s economy is clearly facing challenges. Trade barriers, stubbornly high inflation, and elevated interest rates will likely slow the economy through the end of this year. A precarious government budget also presents a risk that interest rates could move higher. However, inflation is expected to ease soon, which should provide the economy with a reprieve from higher interest rates. Stronger trade ties with China and the European Union could also blunt some of the downsides from US tariffs.
Let’s make this work.
To view this social feed and similar content update your cookie settings to accept advertising and targeting cookies.
By
Michael Wolf
Niko Sawan
Cover image by: Rahul Bodiga
Visit the Deloitte Global Economics Research Center
Access more insights for the consumer spending, housing, business investment, globalization & international trade, fiscal & monetary policy, sustainability, equity, & climate, labor markets and prices & inflation sectors.