Consumption reacts more moderately when credit conditions tighten
In Brazil, a paradox has taken hold: workers are earning more, yet spending far less than history would predict. Despite unemployment below 8 percent and wages climbing 4.7 percent in 2025, household consumption grew only 1.3 percent — one of the widest gaps ever recorded between income and spending. Itaú's economists trace the disconnect not to despair, but to the quiet weight of tightening credit and the growing burden of debt service, forces that intercept income before it ever reaches the marketplace.
- Brazil's labor market is thriving, yet the spending that should follow wage growth has gone nearly silent — a contradiction that defies decades of economic pattern.
- Core personal credit growth cratered from 20.6% in 2024 to just 1.8% in 2025, starving credit-dependent purchases like vehicles and appliances of the financing they require.
- By February 2026, debt repayments consumed a historic 29.7% of household income, quietly redirecting earnings away from new consumption before families could choose otherwise.
- Itaú's models show that every one-point drop in credit growth shaves roughly 0.8 points from consumption — a mechanical drag that wage gains alone cannot overcome.
- For 2026, the bank projects the same imbalance will persist: income growing at 3.6% while consumption trails at just 1.4%, as restrictive monetary conditions continue to delay the credit channel's recovery.
Brazil's economy presents a striking contradiction. Unemployment sits below 8 percent, wages are rising, and disposable income grew 4.7 percent in 2025 — yet household consumption advanced only 1.3 percent. Itaú's research team calls it one of the largest-ever recorded gaps between what Brazilians earn and what they actually spend. Historically, consumption grows at roughly 70 percent of the pace of income gains; last year it fell far short of that benchmark, and the bank's economists expect the same in 2026, projecting just 1.4 percent consumption growth against 3.6 percent income expansion.
The explanation lies primarily in credit. Growth in core personal credit — covering salary-deducted loans, unsecured borrowing, and vehicle financing — collapsed from 20.6 percent in 2024 to just 1.8 percent in 2025. The effect was uneven: salary-deducted credit surged following regulatory changes, while vehicle financing barely moved at 0.6 percent. Itaú's econometric models estimate that each one-percentage-point drop in credit growth reduces consumption by roughly 0.8 points, with the full impact arriving about six months later. The result is visible in spending categories: goods that depend on financing — appliances, furniture, vehicles — have consistently lagged behind items like food, fuel, and clothing, whose demand tracks more directly with income.
A second constraint is the growing weight of debt service. By February 2026, repayments on existing obligations consumed a historic 29.7 percent of household income, leaving less room for new spending despite wage gains. Analysts note that a significant share of that figure reflects interest-free installment card purchases rather than true borrowing, placing the adjusted ratio closer to 20 percent — elevated, but below the 2011 peak. Itaú expects the strong labor market and government transfer programs to prevent a collapse in spending or a wave of defaults. But the underlying dynamic is unlikely to shift soon: Brazil's workers are earning more, and for now, most of it is not reaching the cash register.
Brazil's job market is humming. Unemployment sits below 8 percent. Wages are rising. By every measure that usually predicts robust consumer spending, the economy should be firing on all cylinders. Yet Brazilian households are barely spending. In 2025, disposable income climbed 4.7 percent while consumption inched forward just 1.3 percent—a gap so wide that Itaú's research team calls it one of the largest disconnects ever recorded between what people earn and what they actually buy.
Historically, Brazilian consumer spending grows at roughly 70 percent of the pace of income gains. Last year it fell far short of that benchmark. The pattern is expected to persist. Itaú's economists are forecasting consumption growth of just 1.4 percent for 2026, even as disposable income is projected to expand 3.6 percent. The labor market strength that should be driving purchases isn't translating into the cash registers.
The culprit, according to Itaú's analysis, lies in the credit system. Banks have dramatically tightened lending to individuals. The growth rate for what the bank calls "core personal credit"—salary-deducted loans, unsecured personal loans, and vehicle financing—collapsed from 20.6 percent in 2024 to just 1.8 percent in 2025. The slowdown was uneven across product categories. Salary-deducted credit surged 168.9 percent after regulatory changes opened the market to more competition, while unsecured personal loans grew a modest 9.3 percent. Vehicle financing barely moved, advancing only 0.6 percent. When income growth arrives without compatible credit conditions, the bank's economists Rodrigo Tolentino, Natalia Cotarelli, and Marina Garrido wrote, "consumption reacts more moderately, reflecting financial constraints, the cost of credit, and greater selectivity in loan applications."
The math is stark. Using econometric models, Itaú estimates that a one-percentage-point drop in credit growth reduces consumption by approximately 0.8 percentage points, with the full effect materializing roughly six months later. This dynamic becomes obvious when you separate consumption by category. Goods that depend heavily on credit—furniture, appliances, vehicles, construction materials—have consistently underperformed items whose demand tracks more directly with income: food, fuel, pharmaceuticals, clothing. The credit-dependent categories are simply not moving.
A second brake on spending is the mounting weight of debt service. As more household income goes toward paying interest and principal on existing obligations, less remains available for new purchases. In February 2026, the share of income committed to debt payments hit a historic high of 29.7 percent. That figure requires context, though. A significant portion reflects interest-free installment credit card purchases, which function more as a payment method than as actual borrowing. Excluding that component, the ratio falls to around 20 percent—elevated but below the 2011 peak. With the labor market still strong, the actual drag on consumption is likely smaller than the raw number suggests.
For 2026, Itaú expects the pattern to repeat: consumption will again grow slower than income. The bank projects that favorable income growth—sustained by labor market resilience and continued government transfer programs—should keep spending from collapsing and prevent a surge in loan defaults, even in a tighter credit environment. But the underlying dynamic will persist. "The implicit scenario remains that consumption will once again grow below income, reflecting the persistence of restrictive monetary conditions and the typical lag in the credit channel," the analysts wrote. Brazil's workers are earning more. They're just not spending it.
Notable Quotes
When income growth is not accompanied by compatible credit conditions, consumption reacts more moderately, reflecting financial constraints, the cost of credit, and greater selectivity in loan applications.— Rodrigo Tolentino, Natalia Cotarelli, and Marina Garrido, Itaú economists
The implicit scenario remains that consumption will once again grow below income, reflecting the persistence of restrictive monetary conditions and the typical lag in the credit channel.— Itaú research team
The Hearth Conversation Another angle on the story
Why would a strong job market not translate into stronger spending? That seems backwards.
It would, normally. But credit is the transmission mechanism. When banks stop lending, people can't buy the big things—cars, appliances, homes—even if their paychecks are growing. They're forced to choose between paying down old debt or taking on new purchases.
So it's not that people don't want to spend. They can't.
Exactly. And the data bears it out. Credit-dependent goods are flat. Food and fuel—things you buy with cash from your paycheck—are moving fine. The constraint is real.
What about that debt service number? Twenty-nine percent of income going to debt payments sounds catastrophic.
It would be, except much of that is interest-free installment plans on credit cards. Strip those out and you're at 20 percent, which is high but manageable, especially with unemployment this low. The real issue is the credit freeze, not the debt stock.
So if banks started lending again, consumption would pick up?
Almost certainly. Itaú's models suggest a one-point drop in credit growth shaves 0.8 points off consumption. The reverse should hold. But monetary policy is tight, and banks are being cautious. That's unlikely to change soon.
What does this mean for the economy going forward?
Slower growth than the headline numbers suggest. Incomes are rising, but that money isn't circulating through the real economy the way it normally would. It's being saved or used to pay down debt. That's prudent for households but a drag on overall activity.