We’re gonna need a bigger boat…
There is considerable debate regarding Brazil’s growth potential. Despite a visible acceleration of the Brazilian economy in the post-pandemic period, when GDP grew around 3% per year, we have argued that a considerable portion of this performance is due to the utilization of previously idle resources in the economy, particularly labor, given that the unemployment rate reached as high as 15%, while more recent readings point to something around 5.5%.
Here we attempt to assess the country’s growth potential, particularly GDP per capita, through a simple breakdown of this variable into five distinct factors: (a) demographics; (b) participation of the working-age population in the labor force; (c) the impact of fluctuations in the unemployment rate (the cyclical component); (d) hours worked; and (e) the pace of labor productivity growth.
Here we are interested in removing, or minimizing, the cyclical component of the estimate (the increase in the utilization of idle labor) because such a factor is, by definition, finite: even if we do not know precisely the lower bound of the unemployment rate (for example, the NAIRU), we know that there is no way to permanently increase output through this channel. Sooner or later, the exhaustion of idle labor imposes constraints on this type of economic expansion.
Demographics, as we will see, have contributed substantially to the performance of GDP per capita. The population has aged and, therefore, there has been an increase in the working-age population relative to the total population, the so-called demographic dividend.
Although the demographic dividend can boost the economy for long periods, estimates suggest that this process is close to its end in Brazil, which should occur between 2030 and 2040, that is, about a decade ahead. Its contribution, in any case, as we will see, has been losing strength: about 10 years ago it contributed close to 0.5% per year to GDP per capita growth, while in the more recent period this impact has been around 0.3% per year.
There are, additionally, two adverse developments for economic growth (not necessarily welfare, whose assessment is far more complicated). First, the well-documented reduction in the participation rate, that is, the proportion of the working-age population that is working or seeking employment (the so-called labor force, or Economically Active Population, EAP).
There is suspicion that the expansion of social programs in the more recent period may have played some role in the process, but, regardless of the origin, there is no doubt that there has been a decline in the participation rate in the post-pandemic period, a phenomenon that reduces the economy’s capacity for expansion.
Finally, there has also been a reduction in average hours worked, although these effects are of relatively small magnitude.
This means that growth going forward should depend increasingly on productivity performance (defined as output per hour worked). In this regard, as we will see, the news is not positive. Although there has been some recovery since the end of 2022, our estimates indicate that the current productivity level (in the 12 months ended in September 2025) is only slightly higher, by 0.7%, than that observed at the end of 2013, just before the onset of the Great Recession of 2014-16.
This is not, of course, a death sentence regarding the country’s growth potential, but such performance makes it clear that an acceleration in the pace of sustainable expansion depends crucially on significant improvements with respect to productivity growth.
Our results point to low potential growth. In this sense, as explored below, the Central Bank’s projections for the evolution of the output gap, particularly the transition into negative territory, seem optimistic to us.
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