Brazil: Growth outlook and inflation risks – Societe Generale

Societe Generale’s Dev Ashish reviews Brazil’s updated macro-fiscal projections from the Finance Ministry, highlighting lower GDP forecasts for 2026-27, persistent household debt-service burdens and a less supportive external backdrop. The report notes upside risks to inflation from Oil, El Niño and supply factors, and argues Brazil faces a more challenging rebalancing phase as fiscal support fades.

Finance Ministry revises growth and inflation

"Brazil's Finance Ministry yesterday released its updated macro-fiscal forecasts, adopting a more cautious view on the near-term outlook. The ministry lowered its 2026 GDP growth forecast to 2.0% (in line with our forecast) from 2.3% and its 2027 forecast to 2.3% from 2.5% (SGe: 1.5%), citing the ongoing effects of restrictive monetary policy, weaker services activity and a softer industrial outlook."

"The report argues that Brazil is undergoing a gradual cyclical slowdown (rather than a sharp downturn) as services and manufacturing are feeling the effects of high borrowing costs. Household consumption is also increasingly constrained by record debt-service burdens. Although household indebtedness has stabilised, debt-service payments reached a historical high of 28.9% of income, limiting the pass-through of strong wage growth and a tight labour market into consumer spending."

"The report highlights a more challenging external backdrop. Higher oil prices, renewed Fed tightening, elevated global bond yields and China's continued economic slowdown all represent headwinds for Brazil. At the same time, China's shift toward exporting higher-tech manufactured goods such as EVs, batteries and semiconductors is increasing competitive pressure on global industry."

"The government revised its 2026 IPCA inflation forecast down to 4.9% from 5.1% but raised it for 2027 from 3.6% to 3.8%. While inflation has eased to 4.2% yoy in August, helped by lower food, fuel and electricity prices, the Finance Ministry continues to see upside risks from higher oil prices, fuel pass-through, food prices (reflecting potential El Niño disruptions to agricultural production along with fertiliser supply risks) and a potential reversal in the livestock cycle that would not only lead to higher inflation in the coming months, but could also have some lingering impact through 2027."

"The government's assumption of a moderate growth recovery in 2027 appears optimistic. With fiscal support likely to fade materially after the election, agriculture facing greater weather-related risks, and households burdened by elevated debt-servicing costs, we see growth slowing more sharply (SGe: 1.5%) than the government expects in 2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)