Brazil’s economy will slow further this year and next as very high real interest rates weigh on borrowers and the next government tightens fiscal policy, Fitch Ratings said on October 21, days before a closely fought presidential runoff between President Luiz Inacio Lula da Silva and right-wing Senator Flavio Bolsonaro.
The ratings agency forecast GDP growth of 1.9% in 2026, easing to 1.4% in 2027. That compares with average annual expansion of 3% between 2022 and 2025. The central bank’s proxy for economic activity points to growth of only 1.5% year on year in January-August, Fitch said. Private consumption and investment drove the slowdown, while exports and government consumption held up better.
“Regardless of who wins the presidential election, we expect fiscal policy to tighten next year,” Fitch said. It cited a budget deficit of more than 8% of GDP and a government debt ratio that has climbed above 80% of GDP.
High borrowing costs and rising private indebtedness have lifted the private sector’s debt service ratio to a two-decade high, according to the report. Fitch said this was causing strain among borrowers. Non-performing loans have risen sharply over the past year, partly because of accounting changes but also because corporate bankruptcies have increased. Credit growth has also slowed, especially for companies.
Weaker hiring is a second drag. Employment growth has eased considerably while wage growth has held steady, which has squeezed household disposable income and spending. After several years of above-potential growth, unemployment is close to a record low, leaving little room for further job gains.
Fitch expects the central bank to cut the benchmark Selic rate from 13.75% to 13.50% by the end of 2026 and to 11.75% by end-2027. A significant fiscal adjustment could allow faster cuts and push down longer-term yields, the agency said. Policymakers are still likely to keep real rates high because inflation expectations remain above the 3% target and services inflation has been stuck at 6% for a year. That would keep debt service costs elevated and constrain consumption, investment and credit even as nominal rates fall.
Forecasts edge lower
Fitch’s projections are close to those of private economists. In the central bank’s weekly Focus survey released on October 19, the median 2026 GDP growth forecast slipped to 1.83% from 1.85%, and the 2027 estimate fell to 1.32% from 1.40%. Economists kept their 2026 inflation forecast at 5.22%, above the 4.5% ceiling of the target range. They expect the Selic to end this year at 13.25%, slightly lower than Fitch’s estimate, and to reach 12% by end-2027.
The International Monetary Fund cut its 2026 growth forecast for Brazil to 2.2% from 2.4% on October 12, citing restrictive monetary conditions and reduced fiscal support. The Finance Ministry expects growth of 2%.
Consumer prices rose 0.82% in September, the highest monthly reading since March, as electricity bills jumped after a temporary discount expired, statistics agency IBGE said. Annual inflation reached 4.58% in the 12 months to September, above the upper limit of the tolerance band.
The central bank’s monetary policy committee, Copom, cut the Selic by 25 basis points to 13.75% in September, its fifth consecutive reduction. Minutes of the meeting said inflation expectations remained above target and that policymakers needed “serenity and caution” in deciding their next steps.
Candidates’ economic plans
Bolsonaro took 47.03% of valid votes in the October 4 first round against 45.16% for Lula. While prediction markets give Bolsonaro a considerable advantage in the October 25 runoff, a Quaest poll released on October 21 put Bolsonaro at 45% and the leftist challenger at 44% — a statistical tie given the poll's two-point margin of error.
Bolsonaro’s advisers have floated spending cuts worth BRL150-200bn ($30bn-39bn), or about 1.1-1.5% of GDP, to be passed through a constitutional amendment between the election and the inauguration, newspaper Valor reported. The measures would focus on administrative reform, fewer ministries, a review of civil service pay and fraud prevention, and would initially leave pensions and social benefits untouched. Folha de S.Paulo reported that his team was also studying measures to save BRL250bn, including capping growth in social benefits at the rate of inflation.
Bolsonaro has pledged to keep raising pensions above inflation. “I won’t balance the books on the backs of those who need it most,” he told reporters in Brasilia. Adolfo Sachsida, his campaign’s economic coordinator, said a Bolsonaro government would maintain social programmes, cut taxes and not privatise oil producer Petrobras (B3:PETR4, NYSE:PBR) or Banco do Brasil (B3:BBAS3). The campaign has also promised to sell more than BRL1tn in federal assets, though it has not set a primary surplus target.
Lula, who is seeking a fourth nonconsecutive term, has not committed to fiscal cuts and expanded welfare spending in the final weeks of the first-round campaign, including a 15% increase in Bolsa Familia welfare cash transfers. He has outlined priorities for a fourth term including artificial intelligence training, digital industry, the energy transition and a public security overhaul. This week he accused Bolsonaro of threatening Bolsa Familia after Bolsonaro adviser Daniella Marques proposed a two-year transition for beneficiaries who find formal work. Bolsonaro called the accusation false.
Moody’s, which rates Brazil Ba1 with a stable outlook, said a second Lula term would likely keep the current fiscal framework and narrow the deficit only gradually. It said a Bolsonaro government would likely pursue deep spending cuts but had given few details.
“Without legislative support from Congress, the next government would have limited capacity to deliver a significant reduction in public spending,” Moody’s said.