Latin America’s largest economy slowed to its weakest pace in five years in 2025, and virtually every major forecaster expects further deceleration in 2026. The question is how much — and whether an election year, a Middle East war, and the beginning of rate cuts combine to cushion or deepen the slowdown.
What the Numbers Show
GDP expanded 2.3% for the full year, statistics agency IBGE reported Tuesday, down from 3.4% in 2024 and the weakest result since a 3.3% contraction in 2020. In the fourth quarter, growth barely registered at 0.1% quarter-on-quarter, matching the revised third-quarter reading and confirming a second-half stall.
The strength came from sectors least sensitive to interest rates. Agriculture surged 11.7% on the back of record soybean and corn harvests. Extractive industries grew 8.6%, driven by oil and gas production. Exports of goods and services rose 6.2%. But household consumption — traditionally the main engine of Brazilian GDP — grew just 1.3%, a dramatic slowdown from 5.1% in 2024 that IBGE attributed directly to the contractionary effect of the 15% Selic rate.
A Slower 2026 Ahead
Forecasts for this year range widely. The Finance Ministry projects 2.3% growth, the central bank 1.6%, and private-sector estimates cluster between 1.7% and 1.9%. The Itaú banking group expects 1.9% with upside risk tied to fiscal stimulus and credit growth. Claudia Moreno of C6 Bank forecasts 1.7%, arguing that even with rate cuts beginning, borrowing costs will remain elevated enough to restrain activity.
Most analysts expect a front-loaded year. The Finance Ministry projects a first-quarter acceleration near 1% quarter-on-quarter, boosted by a new income tax exemption for workers earning up to R$5,000 per month ($954) — a flagship Lula campaign pledge ahead of October’s presidential election. Agribusiness should contribute strongly again early in the year. But momentum is expected to fade in the second half as pre-election uncertainty prompts consumers and businesses to wait.
Rate Cuts Meet War Premium
The central bank signaled in January its intention to begin cutting the Selic at the March 17-18 meeting. Markets had priced in a 50-basis-point cut, but the Iran conflict is shifting expectations toward a more cautious 25-point reduction. Andrés Abadía of Pantheon Macroeconomics warned that higher oil prices, while benefiting Petrobras and fiscal revenues, would likely produce a net drag by adding inflationary pressure at the worst possible moment — just as the easing cycle begins.
The political calendar compounds the uncertainty. Recent polls show a tight race between Lula and Senator Flávio Bolsonaro in a potential runoff, with the outcome carrying major implications for fiscal policy. Goldman Sachs has warned that a fourth Lula term cannot repeat the fiscal approach of his third, while market participants have noted that a conservative victory could trigger one of the strongest equity rallies in emerging markets. Either way, the second half of an election year tends to produce an economic pause as businesses defer investment until the political picture clarifies.
This is part of The Rio Times’ daily coverage of Latin American news and Latin American financial news.
For more context, read Brazil’s Morning Call and the USD/BRL exchange rate report.