Brazil economy on track despite U.S. tariffs, but inflation risk up
U.S. President Donald Trump threatened this month to set a 50% duty on Brazilian goods on August 1 in a spat with his counterpart Luiz Inacio Lula da Silva, who vowed to retaliate if diplomacy broke down.
However, even under steep tariffs, Brazil's economy should continue expanding at a gradual rate in 2025 and next year with the help of a resilient jobs market.
Brazil's gross domestic product (GDP) is forecast to increase 2.2% this year and 1.7% in 2026, according to the median estimate of 38 analysts polled on July 14-21.
As in other countries, economists are mostly sticking to a baseline scenario with moderate tariffs. Both forecasts were slightly better than the consensus view of 2.0% and 1.6%, respectively, in an April survey.
"The domestic labor market remains quite tight, with unemployment at new lows and the real wage mass still expanding at a brisk pace," said Roberto Secemski, a Barclays economist.
"At the margin the uncertainty from tariffs reduces those upside risks, but we don't see them derailing growth at this point."
In the poll, inflation is forecast to slow to 4.4% next year from 5.2% in 2025, just a sliver below the top end of the central bank's goal of 3.0% plus or minus 1.5 percentage point.
On potential tariff negotiations between the U.S. and Brazil, 13 of 16 participants who shared a view expected the August 1 deadline set by Washington to be extended, giving room for talks.
Two envisaged a "no deal" situation that would lead to the implementation of the planned 50% U.S. tariff right after the ultimatum date, mirrored by Brazilian retaliation measures.
One saw a deal leaving in place a lower original 10% "reciprocal tariff" the U.S. put on Brazil and other countries in April, with no reprisal from Brasilia.
Hopes for negotiations contrasted with elevated tensions last week after Lula called the threatened duty "unacceptable blackmail", while Washington imposed sanctions on Brazilian officials.
Trump has linked the 50% tariff to the treatment of former President Jair Bolsonaro, who is on trial over charges of plotting a coup. Additionally, the U.S. launched an investigation into Brazil's trading practices.
Still, the median U.S. tariff on Brazilian goods assumed in analysts' forecasts was 30%, according to answers to another question, considerably lower than Trump's threatened 50%.
Responses to a separate question on Brazil's potential GDP growth in 2026 in a "no deal" scenario pointed to a 1.6%-1.7% consensus range, virtually the same expansion as in the baseline case.
While the U.S. is the second biggest destination of Brazil's exports after China, analysts noted the Latin American country may avoid tariff impact by further redirecting trade to its top market in Asia.
Yet the median range for next year's inflation forecast under "no deal" was 4.4%-4.9%. This reflected some chances of Brazil exceeding the upper inflation goal bound of 4.5%, which would again frustrate the central bank.
Policymakers are expected to keep the country's benchmark interest rate at a two-decade high of 15% at least until the end of 2025, the poll showed.
"The main impact of a no-deal scenario and retaliation by Brazil would likely be on the exchange rate," Santander analysts wrote.
"Uncertainty about the effects of these events on the domestic economy would probably be reflected in currency depreciation and a reversal of the current inflation downward trend."
(Other stories from the Reuters global economic poll)
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