Brazil’s manufacturing industry faced significant headwinds in 2025, grappling with the dual pressures of elevated domestic interest rates and stringent tariffs imposed by the United States. This challenging environment severely impacted the sector’s performance, contrasting sharply with the robust growth observed in the preceding year. The latest economic assessments highlight a broad deceleration across credit-sensitive segments, underscoring the vulnerability of key industrial activities to macroeconomic shifts and international trade policies. The overall economic expansion, while positive, masked underlying struggles in critical productive areas, indicating a complex and uneven recovery trajectory for the nation’s economy.
The manufacturing industry, specifically, saw a contraction of 0.2% in 2025, a stark reversal from its 3.9% expansion in 2024. This downturn contributed to a broader slowdown in Brazil’s Gross Domestic Product (GDP), which advanced by 2.3% in 2025, a noticeable deceleration from the 3.4% growth recorded in 2024.
Exports from the transformation industry to the American market experienced a significant decline, retreating by 8.7% in the second half of 2025 compared to the same period in the previous year. This substantial drop underscores the direct impact of foreign trade barriers on Brazilian producers seeking to access one of their most crucial international markets.
Domestic monetary policy squeezes industrial activity
Domestically, the persistent high interest rates exerted considerable pressure on economic activity throughout 2025. The real interest rate, a key indicator of borrowing costs, surged from 7.2% in January to a challenging 10.6% by December. This sharp increase made credit significantly more expensive, directly impacting sectors heavily reliant on financing for investment and operations.
The elevated cost of capital particularly stifled growth in segments most sensitive to credit availability, such as the manufacturing industry and the construction sector. These industries often depend on affordable loans for purchasing machinery, expanding facilities, and managing working capital, making them highly susceptible to shifts in monetary policy.
US tariffs impact export performance
The implementation of tariffs by the United States proved to be a critical external factor undermining Brazil’s manufacturing exports in 2025. These trade barriers significantly reduced the competitiveness of Brazilian goods in the American market, leading to a substantial decrease in demand and shipment volumes.
Brazilian producers, already navigating complex global supply chains, faced additional costs and reduced profit margins due to these tariffs. The resulting decline in export revenue limited the capacity for investment and job creation within the affected industrial segments, exacerbating the domestic challenges.
The retreat of exports to the US market, a traditional destination for Brazilian manufactured goods, highlighted the need for diversification of trade partnerships and a more robust strategy to mitigate international trade protectionism. This external pressure compounded the difficulties posed by internal economic conditions.
Natural resources sustain overall growth
In contrast to the struggles faced by the manufacturing and construction sectors, activities linked to natural resources demonstrated strong performance, providing a crucial buffer for the overall economic growth in 2025. The agro-industry and the extractive industry, in particular, delivered robust results, fueled by global demand for commodities.
This dichotomy highlights a persistent structural characteristic of the Brazilian economy, where commodity-driven sectors often outperform value-added industries during periods of economic uncertainty or domestic tightening. The strong showing of these segments helped to mitigate the broader economic deceleration.
The reliance on natural resource sectors for growth, while beneficial in the short term, also underscores the ongoing challenge of fostering sustainable and diversified industrial development. It suggests that despite efforts to industrialize, the economy remains heavily influenced by commodity cycles.
Key segments experience a turnaround
The sharp rise in real interest rates specifically caused a significant deceleration in two segments that had been instrumental in leading Brazil’s economic growth in 2024: capital goods and durable goods. These sectors, which represent investments in productive capacity and consumer spending on long-lasting items, are particularly vulnerable to higher borrowing costs.
The diminished demand for capital goods reflects a reduction in business investment, as companies postpone or cancel expansion plans due to increased financing expenses. Similarly, the higher cost of consumer credit curbed purchases of durable goods, affecting industries ranging from automotive to home appliances.
Economic outlook for 2026
Despite the challenging landscape of 2025, projections for 2026 anticipate a modest economic expansion. The overall GDP is forecast to grow by 1.9%, indicating a continued, albeit slow, recovery trajectory. This cautious optimism is tempered by the expectation that interest rates will remain elevated, even with a downward trend, which will continue to act as a constraint on economic activity.
The persistent high-interest rate environment suggests that the Central Bank remains vigilant in its efforts to control inflation, prioritizing monetary stability over more aggressive economic stimulation. This approach implies that credit-sensitive sectors may continue to face headwinds, albeit potentially less severe than in 2025.
However, several factors offer an upside bias to these projections, suggesting potential for stronger growth. Government initiatives aimed at stimulating demand, such as income tax exemptions for salaries up to R$5,000, are expected to boost household consumption and inject vitality into the economy. These fiscal measures could provide a much-needed impetus to aggregate demand.
Furthermore, the prospect of increased public investments by subnational entities, particularly state governments, driven by the electoral cycle, is poised to reinforce economic expansion. These investments often target infrastructure projects and public services, creating jobs and stimulating local economies, contributing significantly to overall growth.
Q1 2026 projections and stimulus
For the first quarter of 2026, a GDP growth of 1% is anticipated, underpinned by strategic financial injections. This projection takes into account the exceptional release of funds from the FGTS (Guarantee Fund for Length of Service) balance, which is expected to positively influence household consumption. The availability of these funds provides a direct boost to consumer spending power, stimulating various segments of the economy.
The targeted release of FGTS funds represents a deliberate effort to inject liquidity into the economy, aiming to offset lingering credit constraints and foster a more dynamic consumer market. This measure, combined with other demand-side stimuli, is crucial for sustaining the modest recovery expected in the initial months of the new year.
