Brazil income keeps rising, but household spending stalls

Several explanations are on the table. A larger share of household income may be going to debt payments. Prices are still high. And wage income appears to be rising more because people who already have jobs are earning more, rather than because many new workers are entering the labor market.

That is unusual. For years, income and consumption tended to move in tandem: when households earned more, they spent more. Since the pandemic, that link has weakened, and the gap became much clearer in 2025.

“Up through 2023 and 2024, income and consumption were still broadly moving together. In 2025, that divergence became much more pronounced,” said Rodolfo Margato, an economist at XP. Yihao Lin of Genial Investimentos said the gap has started to look like a “crocodile mouth” opening wider, which he described as puzzling.

By Margato’s calculations, the Central Bank’s broad measure of gross disposable household income rose about 4.8% in real terms last year. XP’s own gauge of disposable household income from all sources showed a similar increase. Yet household consumption in GDP rose only 1.3% in 2025. “That result surprised us, given what our income proxy was signaling,” Margato said.

He points to another sign that something is off. XP uses a model to forecast consumption based on household disposable income, credit origination and consumer expectations from Getulio Vargas Foundation’s confidence index.

“Historically, this model has worked very well. As a rule of thumb, going back to the beginning of the century, about 70% of additional household income tends to flow into consumption. This model was pointing to consumption growth in GDP closer to 2%,” he said.

Instead, household consumption was flat in the fourth quarter of 2025 from the previous three months, after edging down 0.1% in the third quarter. The market had expected a 0.3% increase.

After that result, Genial, which had been looking for consumption growth of around 0.5%, revised its 2026 GDP forecast. “Our scenario for this year was heavily based on stronger household consumption. The labor market had been surprising, the wage bill was accelerating, and that gave us the impression consumption could be much stronger. That did not happen. The labor market alone no longer seems to be enough to drive it,” Lin said.

Wages rise, spending lags

Fernando Montero, chief economist at Tullett Prebon, notes that restricted household income has continued to rise as a share of GDP. Since the start of the Central Bank’s series in 2013, it has increased by 5.7 percentage points. That is not a record, but earlier peaks came either during the pandemic, when emergency aid was massive, or during the 2015-17 recession, when weak nominal GDP, rather than strong income, supported the ratio.

Breaking down the Central Bank figures into labor income, based on Brazil’s household employment survey, and primary transfers, Montero finds that labor income is up 1.8 percentage points over the series, while transfers have risen 3.9 points.

Over the past year and a half, though, transfers have been flat relative to GDP, while labor income has recovered ground lost during the pandemic, Montero said. Even so, consumption has not kept up. One possibility, he said, is that part of the extra post-pandemic income is being saved, mirroring lower public-sector savings.

Another possibility comes from credit data. Deteriorating indicators such as defaults, indebtedness and debt-service burdens may suggest that the additional income is being absorbed by interest payments, Montero said.

Santander sees the same tension. Real income is still growing at a strong 5% pace, which should normally translate into a clearer improvement in families’ sense of financial well-being, said Ana Paula Vescovi, chief economist at Santander Brasil. But total debt payments, including interest and amortization, are rising almost 12% in real terms. As a result, income left over after debt service is growing much more slowly, at just 2.4%.

Margato says there is still no strong macro evidence that households are channeling extra income into savings. “There has been more financial investment and more capital-market exposure among some groups, especially higher-income households. But from a macro standpoint, we do not see evidence of a broader increase in savings,” he said.

In his view, part of the gap between income and consumption can be explained by heavier debt burdens. “Looking more broadly, in an environment of restrictive interest rates and higher debt levels, we have seen a larger share of income being tied up, in other words, a more significant portion going to debt service,” he said.

The share of household income committed to debt service hit a record in the Central Bank series, which began in 2005, when it reached 29.3% in October last year. It was still 29.2% in December, the highest year-end reading on record, and returned to 29.3% in January.

Household indebtedness relative to income over the previous 12 months also ended 2025 at a yearly peak of 49.7%. On a monthly basis, that was second only to the 49.9% seen in July 2022.

“Even adjusting for delinquency, households are devoting a larger share of income to servicing debt and paying interest,” Margato said. “That is an important part of the explanation for slower consumption despite strong income gains. But it is only part of the story. It does not fully add up yet. There is still something here that we do not fully understand.”

Jobs weight

Montero points to another possible explanation: income has been rising less because more people are working and more because those already employed are earning higher wages.

“Each new source of income gives a household more confidence and gives banks more collateral. In that sense, a new income source is more than just additional income,” he said. “When someone gets a job, they gain access to credit.”

Citi Brasil raises a similar point. Its models suggest consumption is about three times more sensitive to job growth than to real wage gains. The bank’s team, led by Leonardo Porto, notes that household consumption rose 1% in the fourth quarter of 2025 from a year earlier, less than overall GDP growth of 1.8% and far less than the 6.4% increase in the total wage bill. In Citi’s view, that is because consumption responded more to the 1.1% rise in employment than to the 5% increase in wages themselves.

Lin also points to still-high prices, a source of discomfort captured in Genial/Quaest surveys. “That may be part of the reason consumption is not stronger. Inflation may be behaving better, but we are not talking about deflation. Prices have stopped accelerating, but there has been no real restoration of purchasing power since the end of the pandemic,” he said.

The accumulated hit to household budgets has come mainly from essentials such as electricity and food, he said. “There is no way around those expenses, and they squeeze disposable income. If you spend more on essentials, there is less left for discretionary consumption.”

Spending recover

Whatever is behind the gap between income and consumption, Montero says one question remains. If the sharp rise in household income is no longer enough to support both debt service and consumption because of the lagged effects of high interest rates, what happens when that income growth, heavily supported by a labor market with little autonomy of its own, another round of unsustainable fiscal stimulus and slower inflation, starts to lose momentum?

Margato believes household consumption can still pick up in 2026. “Our working assumption is that the gap between income and consumption narrows back toward its historical average,” he said.

That view rests on the resilience of both the labor market and credit, which he says was already visible in January data.

He also points to a package of government stimulus measures that should support demand in the near term. XP estimates that together they could add 0.9 percentage point to GDP. That estimate uses conservative assumptions, Margato said, such as R$15 billion in home-renovation credit, even though the government says as much as R$40 billion could be made available.

“There are arguments that the effect may be more limited precisely because households are more indebted and may also behave more cautiously in an election year, especially when it comes to durable goods. I understand those arguments. But we are still talking about an impact of nearly 1 percentage point of GDP, against the backdrop of a resilient labor market. Under those conditions, it is hard to see consumption not picking up again,” he said.

XP forecasts household consumption growth of 1.9% in 2026, close to its 2% forecast for overall GDP.

Genial is even more optimistic, projecting household consumption growth of 2.5% this year while also forecasting 2% GDP growth. Lin expects unemployment to move toward 6.1% by year-end, still well below the 7.7% “natural” unemployment rate his firm estimates for Brazil.

“We will still have a very tight labor market, and that will keep pressure on wages,” he said.

He expects the real wage bill to grow 4.5% on average in 2026, or 4.7% by year-end, equivalent to roughly 8.5% to 9% in nominal terms. “We are once again talking about a year of strong consumption growth, and that is one of the pillars of our economic scenario,” he said.