Brazil’s Factory Downturn Deepens as Tariffs, High Rates and Weak Demand Converge

Key Points

• Brazil’s manufacturing PMI fell to 47.0 in January, the worst in four months, extending a contraction streak that began in mid-2025 as orders collapse at home and abroad.
• U.S. tariffs of up to 50% on Brazilian goods continue to suppress exports, with manufacturers reporting suspended contracts from American clients.
• Despite the gloom, business confidence hit its highest since June 2025 on hopes that the Central Bank will begin cutting rates from the 15% Selic as early as March.

Brazilian manufacturers entered 2026 deeper in contraction, with the S&P Global PMI dropping to 47.0 in January from 47.6 in December — the sharpest deterioration in four months.

The decline in total sales marked the tenth consecutive month of falling orders and the second-steepest in nearly three years.

Capital goods producers led the output decline, a troubling signal for business investment. Intermediate goods makers recorded sharp drops, while consumer goods saw only marginal weakness.

Employment fell for the second straight month as firms cited cost-control measures and weak demand. On the export side, manufacturers pointed directly to American tariffs.

Since July 2025, Brazilian goods have faced a cumulative 50% duty — a 10% reciprocal levy plus a 40% country-specific surcharge signed by President Trump under a national emergency declaration, the highest imposed on any single nation.

Agricultural exemptions granted in November removed levies on coffee, beef and fruit — covering roughly 42% of Brazil’s export volume to the U.S. — but manufactured exports remain heavily penalized.

Brazil Industry Slumps Await Rate Relief

The U.S. Senate voted 52-48 in October to end the emergency, though the House blocked action until March 2026.

Domestically, the Selic rate at 15% — the highest since 2006, held for five straight meetings — continues to choke credit and spending.

GDP growth forecasts for 2026 range from 1.5% to 1.8%, sharply down from 3.4% in 2024. Public debt is heading toward 84% of GDP.

Input costs rose for the first time in three months as factories paid more for food, metals, electronics and plastics, forcing price increases after four months of discounting.

The political reading splits predictably. The left frames the slump as collateral damage from politically motivated U.S. trade aggression, noting that Lula’s firm diplomatic stance boosted his approval ahead of October’s presidential election.

The right blames unsustainable government spending that clashes with monetary tightening, arguing the fiscal trajectory demands structural reform rather than election-year stimulus.

Yet manufacturers are quietly hopeful. Brazil’s services sector, by contrast, expanded strongly in December, pulling the composite PMI above 50 for the first time in nine months.

And factory confidence reached its highest since June 2025, fuelled by expectations that Copom will begin easing in March and demand will gradually improve. Whether that materializes before the vote will shape the trajectory of Latin America’s largest economy.

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