Brazil’s economic challenges after the Lula–Bolsonaro runoff

Brazil faces crucial economic challenges following the upcoming runoff between incumbent President Luiz Inácio Lula da Silva and opposition candidate Flávio Bolsonaro. As the second-most populous nation in the Americas and the continent's second-largest economy, Brazil trails only the United States in these categories. The country's proximity to Argentina, one of its key trading partners, makes its election even more significant on the global stage.

Economist Honorio Zabaleta notes that Brazil's economy enters the runoff in a resilient state, albeit with a diminishing momentum. According to official data, GDP grew by 0.5% quarter-on-quarter and 2% year-on-year in the second quarter. However, consumer spending appears to be slowing down, primarily due to high real interest rates. The Selic rate currently stands at 13.75%, while consumer price inflation, measured by the IPCA index, reached 4.2% in August.

High interest rates have attracted substantial capital inflows but have also contributed to growing household debt. In May, Lula expanded the Desenrola Brasil program to help households renegotiate their debts, but default rates reached a record 6.6% among loans without government subsidies. Brazil's fiscal deficit is a major concern, with interest payments leaving a "significant hole" in the Lula administration's accounts, resulting in a fiscal deficit of about 9% of GDP.

Gross general government debt is already at 82.9% of GDP, with estimates varying between 97% under the IMF methodology.

The incumbent and potential president must address the unsustainable fiscal deficit, which is already unsustainable despite limited tools available to tackle it. Fiscal austerity and slower growth are expected to be priorities for either Lula or Bolsonaro. While Lula might focus on tighter spending controls while preserving social programs, Bolsonaro is expected to pursue greater fiscal discipline, spending cuts, privatizations, and structural reforms.

Either way, Zabaleta expects fiscal restraint to slow economic growth in 2027, with market consensus forecasts a growth rate of 1.8% this year and 1.3% the following year.