Summary of the Brazilian economy in 2024

In 2024, the Brazilian economy continued to outperform. As in 2023, gross domestic product (GDP) growth for 2024 is expected to be significantly higher than the forecasts published by experts early in the year. While the Brazilian economy was initially expected to grow by less than 2%, at the end of 2024 economists forecast an expansion of close to 3.5%. Higher growth rates were a major factor influencing the decision of the credit rating agency Moody’s to upgrade in October Brazil’s credit rate to Ba1, one notch below the investment grade level.

In 2024, the growth of the Brazilian economy was boosted mainly by private consumption, government transfers and investments (the latter was influenced by the monetary loosening cycle that lasted from August 2023 to September 2024). A heated job market has been a particular factor boosting the domestic demand. In 2024, the unemployment rate followed a downward trend and reached 6.2%, the lowest level of the series, started in 2012.

Despite the positive results, there is a widespread assessment by specialists that the Brazilian economy is growing above its potential, with an expansionary fiscal policy being particularly a cause for concern. For 2024, Brazil is expected to have a primary budget deficit (result that does not consider interest payments on public debt) of 0.5%, a nominal deficit of close to 8% and a debt-to-GDP ratio of almost 80%, a high level for an emerging market with relatively low growth rates.

Moreover, the growth of the Brazilian economy above its potential has resulted in greater challenges to control prices. Inflation has been accelerating and the official rate is expected to reach almost 5%, above the upper threshold of 4.5% of the tolerance range established by the Brazilian central bank.

To address fiscal imbalances, the government announced in November a long-awaited package that nevertheless fell short of expectations. Although the package includes measures such as limits to the growth of the minimum wage, a cap on the salaries of public servants and a higher income tax for well-off individuals, an exemption for people earning up to R$ 5,000 per month was announced, from the current level of R$ 2,824. The measures were considered insufficient and the ambiguous character of the package was interpreted by market economists as a signal of the government’s reluctance to take the necessary measures to control increases in public indebtedness, which may put more pressure in the Brazilian central bank in the effort to control inflation.

Uncertainties about the effectiveness of the government’s fiscal policy are expected to result in increased risk aversion by foreign investors and higher volatilities in the exchange rate. In 2024, the real devalued by more than 25% against the dollar and the nominal exchange rate reached record highs in nominal terms. While in January US$ 1 was worth less than R$ 5, in December the value of the dollar reached more than R$ 6, in spite of interventions by the Brazilian central bank to mitigate exchange rate volatilities. The devaluation of the Brazilian currency may even impact the position of the country in the ranking of the largest economies in the world. In the beginning of the year, Brazil ranked as the eighth largest economy in the world, but more recent exchange rate levels indicate that the country may decline to the tenth position.

A slowdown is expected for 2025 due to the monetary tightening cycle initiated in September by the Brazilian central bank, which is expected to be continued during next year. Between September and December, the rate hikes adopted by the Brazilian central bank made the benchmark interest rate rise from 10.50% to 12.25%; in 2025 the rate is expected to reach at least 14%. As a consequence of a more adverse economic situation, for 2025 the GDP is expected to grow by around 2%.

Regarding governance, it is worth mentioning that 2024 was the last year of the mandate of Roberto Campos Neto as president of the Brazilian central bank. From 2025, Gabriel Galípolo will head the institution. While the former was appointed by Jair Bolsonaro, the latter was chosen by Lula da Silva.

In 2024, the tax reform continued to advance. In December, the Brazilian congress approved the bill that defined the details of the constitutional amendment reforming consumption taxation. With the reform, two value-added taxes will be created (a federal tax and a state and local government one) that will replace five existing taxes. The total rate of the two new taxes is projected to stand at around 28%, making Brazil the country with the highest value-added tax rate in the world.

Industrial policy also played an important role in the government’s agenda for the economy in 2024. In January, the government announced a plan (called Nova Indústria Brasil) that will make available public funds totalling R$ 406 billion (approximately € 62 billion) until 2033 to promote innovation, digitalisation, green transition and productivity in the industrial sector.​ The plan aims to address the government’s concerns regarding the reduction of high value-added goods in Brazil’s economic output and a lower share of the industrial sector in the country’s production.

Concerning international economic relations, foreign trade provided in 2024 a less relevant contribution to economic growth, as exports declined and imports rose as a consequence of the intense economic activity. In terms of foreign direct investment (FDI), Brazil is expected to remain a major destination of resources. According to the Organisation for Economic Co-operation and Development, Brazil was the second-largest destination for FDI in the world during the first half of the year, behind the United States. As regards foreign trade, a major development for Brazil in 2024 was the conclusion of negotiations, after over two decades, of the EU-Mercosur trade deal, yet to be ratified by the partners.

At last, it should be noted that in 2024 the Brazilian economy was strongly affected by an extreme weather event. In addition to the loss of lives, the floods of April and May that caused havoc in the state of Rio Grande do Sul resulted in significant economic impacts on a major industrial centre in Brazil. Recovery of the state’s productive capacity is expected to last years.

In summary, in 2024 the performance of the Brazilian economy was characterised by better-than-expected growth in the output, positive results in job creation and investments and concerns about the risks for the future inherent to the economic policy options adopted by the government. Given these conditions, the years ahead are expected to be challenging.

 

References

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