Brazil Faces Stagflation Risks in 2025, UBS BB Warns

Brazil may be heading toward a period of stagflation in 2025, according to a report by UBS BB. The bank projects GDP growth of just 1.3%, well below the market consensus of 2%, while inflation is expected to remain above the target ceiling.

Economists Alexandre de Azara and his team highlight that stagflation—a combination of stagnant growth and persistent inflation—poses unique challenges for policymakers.

Despite Brazil surpassing economic expectations in recent years, key indicators now signal a slowdown. Retail sales, industrial production, service sector performance, and employment data have all underperformed.

Consumer and business confidence indices have fallen below 100 points, reflecting widespread pessimism. Fiscal policy played a significant role in propping up growth in 2024, with over R$100 billion injected into the economy through court-ordered government payments (precatórios).

However, UBS BB estimates this fiscal boost will drop to around R$50 billion in 2025, dampening consumer demand. Meanwhile, central government spending is expected to remain high, exacerbating concerns over fiscal credibility.

Investment activity also appears set to weaken. UBS BB forecasts investment growth of only 0.5% in 2025, compared to 7% the previous year. High real interest rates and currency instability are cited as key factors curbing productive investments.

Brazil Faces Economic Deceleration Amid High Inflation

The bank notes that restrictive monetary policy has already begun impacting retail sales, industrial output, and service revenues. Labor market data further underscores the economic deceleration.

In December 2024, only 20,000 net jobs were created—far below the expected 90,000—prompting downward revisions for prior months. This weak performance raises concerns about unemployment trends and job recovery.

High inflation remains a pressing issue. UBS BB projects Brazil’s main inflation gauge, the IPCA, will stay above the upper target limit of 4.5% until at least March 2026. This complicates efforts to achieve the long-term inflation goal of 3%.

In response, the Central Bank is unlikely to cut interest rates soon and may raise the Selic rate by 100 basis points at each of its next two meetings. The report also highlights exchange rate volatility.

Following tax policy announcements in late 2024, the Brazilian real briefly devalued to R$6.20 per dollar before stabilizing. However, interest rate expectations remain elevated, with markets pricing a Selic rate of 17% by late 2025.

UBS BB warns that prolonged high interest rates could further hinder economic growth and investment prospects, deepening Brazil’s economic challenges in the coming years.