High consumption, low productivity: the Central Bank’s dilemma
GDP grew in line with expectations, 1.1%, far stronger than observed during the second half of 2025, when the economy remained stagnant. From the supply perspective, the highlights were once again agriculture and the mineral extraction to which we can also add construction. Although we include the latter among the more cyclical sectors, alongside trade and manufacturing, these segments combined still contributed less than the sectors more closely linked to the international market.
The breakdown from the demand perspective was distorted by the import of an oil platform, which simultaneously increased gross fixed capital formation on the domestic demand side and imports, reducing external demand. That said, consumption showed strong performance, much better than observed throughout 2025, particularly during the second half of the year.
As a result, the carry-over for 2026 reached 1.4%, still in line with our growth projection between 1.5-2.0% for the year, which obviously assumes positive, but slower, growth in the remaining quarters.
We understand, however, that the economy’s growth capacity remains limited. Although affected by the import of the aforementioned platform, gross fixed capital formation stands around 17% of GDP, below the level recorded throughout 2025, while the savings rate remains at 14.4% of GDP, insufficient to finance even the low level of investment.
Additionally, productivity remains stagnant. Output per hour worked has remained virtually unchanged over the last 9 quarters (BRL 63.5/hour-year). However, as there has been a small increase in hours worked per employee, output per worker is still growing modestly, around 0.5% per year over the same period, a pace far below nominal wage growth, implying a persistent increase in Unit Labor Costs (ULC), with inflationary consequences.
Consistent with this, our estimates suggest a widening of the output gap during the period, in the opposite direction indicated by the Central Bank, even with a modest increase in unemployment.
Although growth proved solid in the first quarter, we expect some slowdown ahead, given that monetary policy remains in contractionary territory, which would – as noted – be congruent with GDP growth in the range of 1.5% to 2.0% in 2026.
Such a pace, despite the marginal slowdown, does not appear compatible with a significant reduction in the output gap. We additionally note that economic policy should prioritize activity expansion in light of the election, as explored in our recent reports, particularly regarding measures aimed at increasing the supply of credit to households, thereby stimulating consumption.
Even so, our scenario still contemplates the Copom delivering a modest reduction in the Selic rate, given that its strategy suggests inflation converging to the target over a more distant period than the so-called relevant horizon.
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