Brazil economy operating above structural growth limit

The Independent Fiscal Institution (IFI) has reported that the Brazilian economy has been operating above its structural growth limit since the first quarter of 2024. This indicates a lack of significant idle capacity and the presence of cyclical pressures.

According to new estimates, the output gap—the difference between actual GDP and potential GDP—reached 1.0% at the start of 2025 and is projected to decelerate slightly to 0.9% in the first quarter of 2026. A positive output gap serves as a macroeconomic warning sign, suggesting the economy is demanding more than its structural foundations can sustainably deliver, which can lead to inflationary pressures.

The IFI updated its methodology to improve the precision of these measurements by including natural capital. Unlike traditional models that focus solely on labor and physical capital, the new approach incorporates environmental assets, such as harvested crop areas and energy consumption, into the production function.