"Brazil's Economic Growth: A Tale of Two Halves in 2024"

Brazil's economy in 2024 was a study in contrasts. The year began with a robust 3.4% growth, driven by strong domestic demand and a resilient labor market. However, the momentum slowed significantly in the fourth quarter, with GDP expanding by a mere 0.2%. This deceleration reflects broader economic trends and policy challenges that will shape Brazil's trajectory in the coming years.

The first half of 2024 was marked by a surge in consumer spending and business investment. Retail sales grew by 3.2% year-on-year in August, while gross fixed-capital formation increased by 10.5% in July. The labor market remained tight, with the unemployment rate falling to 6.7% in August, the lowest since 2014. This tight labor market fueled strong wage growth, with average earnings up 9.6% year-on-year in August. The combination of robust consumer spending and business investment drove the economy forward, despite a disappointing performance in the agricultural sector, which contracted by 3.2% year-on-year.

However, the second half of the year saw a gradual moderation in economic activity. Services, which had risen by 2.6% in the first half of the year, stagnated in July and August before rebounding by 1% in September. Retail trade, which had increased by 5.1% in the first half of the year, remained broadly unchanged in July and August before rising again by 0.5% in September. Industrial production followed a similar pattern, with a strong expansion in early 2024 and weaker performance in July and August. This slowing down was further reflected in the 0.2% growth in the fourth quarter.

The deceleration in the second half of the year can be attributed to several factors. Firstly, the slowdown in export market growth limited export expansion. Secondly, private investment, while remaining buoyant, began to slow gradually. Additionally, fiscal policy remained expansionary, and meeting the primary deficit target of at most 0.6% of GDP required by the new fiscal framework proved challenging. This required a further squeeze of discretionary spending in the absence of broader reforms.

Monetary policy also played a crucial role in shaping Brazil's economic growth in 2024. The Central Bank increased the key policy rate by 25 percentage points in September and by 50 percentage points to 11.25% in November. This monetary tightening was aimed at addressing inflation, which had picked up in the second half of 2024. However, the outlook for inflation remained uncertain, with the Central Bank projecting that inflation would converge towards the 3.0% target by 2026, although at a slow pace.

The effectiveness of these policies in addressing inflation and other economic challenges was mixed. While the monetary tightening helped to curb inflationary pressures, the fiscal policy remained expansionary, and meeting the primary deficit target proved challenging. This required a further squeeze of discretionary spending, which could further slow down economic growth in future quarters.

Looking ahead, Brazil's economy is expected to grow by 2.3% in 2025 and 1.9% in 2026. This slowing down is expected to be driven by a slowdown in export market growth, which will limit export expansion, and a gradual slowing of private investment, which will remain buoyant but at a slower pace. Additionally, the fiscal policy remains expansionary, and meeting the primary deficit target of at most 0.6% of GDP required by the new fiscal framework will be challenging in 2024 and 2025. This will require a further squeeze of discretionary spending in the absence of broader reforms, which could further slow down economic growth in future quarters.

In conclusion, Brazil's economic growth in 2024 was a tale of two halves. The first half of the year was marked by strong domestic demand and a resilient labor market, while the second half saw a gradual moderation in economic activity. The deceleration in the second half of the year can be attributed to several factors, including a slowdown in export market growth, a gradual slowing of private investment, and fiscal policy challenges. Looking ahead, Brazil's economy is expected to continue slowing down, with growth projected to be 2.3% in 2025 and 1.9% in 2026. This slowing down is expected to be driven by a slowdown in export market growth, which will limit export expansion, and a gradual slowing of private investment, which will remain buoyant but at a slower pace. Additionally, the fiscal policy remains expansionary, and meeting the primary deficit target of at most 0.6% of GDP required by the new fiscal framework will be challenging in 2024 and 2025. This will require a further squeeze of discretionary spending in the absence of broader reforms, which could further slow down economic growth in future quarters.