Economic growth taps on the brakes in Q2

Near 20-year high interest rates take a toll on GDP growth: As projected by our Consensus, sequential GDP growth lost steam in the second quarter, falling to 0.4% on a seasonally adjusted quarterly basis, below the downwardly revised 1.3% expansion in the first quarter. A sharp slowdown had been anticipated, with the highest interest rates in nearly two decades beginning to trickle down through the economy. That said, Q2’s deceleration was marginally softer than analysts had expected, and it marked the 16th consecutive expansion—the longest streak since the current GDP series began in 1996—bringing GDP to a record high. On an annual basis, economic growth slowed notably to 2.2% in Q2, following the previous period's 2.9% growth and marking the softest reading since Q1 2022.

Most of the economy slows: Domestically, private consumption growth halved to 0.5% in the second quarter from 1.0% in the first; record-low unemployment, higher real wages and state assistance programs prevented a sharper deceleration. Moreover, public spending dropped 0.6% after flatlining in Q1, and fixed investment declined 2.2% in Q2 (Q1: +3.2% s.a. qoq); both these readings were the worst since Q3 2023. Turning to the external sector, exports of goods and services increased 0.7% in the second quarter, which was below the first quarter's 3.1% expansion. That said, imports of goods and services—which detract from GDP—deteriorated, contracting 2.9% in Q2 (Q1: +5.5% s.a. qoq), marking the worst reading since Q1 2023. Looking at sectoral data, the moderation in GDP growth was due to the agricultural sector deteriorating notably in Q2, contracting 0.1% (Q1: +12.3% s.a. qoq). More positively, the services sector—which accounts for roughly 60% of GDP—improved (Q2: +0.6% s.a. qoq; Q1: +0.4% s.a. qoq), as did the industrial sector (Q2: +0.5% s.a. qoq; Q1: 0.0% s.a. qoq).

GDP growth to decelerate to a near halt in H2: Our Consensus is for sequential GDP growth to almost halt in Q3–Q4 as nearly two-decade high interest rates trickle down to the real economy. Accordingly, in 2025 as a whole, GDP is set to grow at the softest pace since contracting in 2020 as a result of the Covid-19 pandemic. In 2025, inflation is projected to average at a three-year high, and interest rates will remain elevated in the rest of 2025, restraining private spending and fixed investment growth. Still, a robust labor market will lend some support to wage growth and, in turn, household consumption. Moreover, the agricultural sector should rebound strongly and exports growth is projected to be largely stable. Key downside risks to the GDP outlook are extreme weather and the 50% tariffs the U.S. slapped on a range of Brazilian goods in August.

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