Brazil’s economy slows in Q2 but beats forecasts as services, mining shines

Brazil's economy slowed more than expected in Q2 2025, but still beat market expectations, with supporting services activity and extractive industry gains.

Official figures from the statistics agency IBGE, released on Tuesday, showed that the gross domestic product grew 0.4% in the previous quarter, above the 0.3% quarterly increase seen in a Reuters poll of economists.

The number represented a sharp decrease from the revised 1.3% rise in the first quarter, when robust seasonal farm output had boosted the agricultural powerhouse. GDP climbed 2.2% year on year, meeting market estimates.

Economists see a gradual slowdown ahead

Despite the minor positive surprise, analysts cautioned that the figures indicate a cooling trend. Gustavo Rostelato, an economist at Armour Capital, said the statistics confirmed a gradual decrease in household consumption.

Liam Peach, senior emerging markets economist at Capital Economics, stated that weaker growth supports an improving inflation outlook, allowing the central bank to contemplate relaxing monetary policy.

He expected GDP to grow by 0.3% quarter on quarter in the future quarters, with full-year growth of 2.3% in 2025 and less than 2.0% in 2026.

Monetary policy stance remains tight

The Brazilian central bank hiked rates aggressively in the past 12 months to 15%, a level close to a two-decade peak, moving the benchmark up 450bp from September.

In July, the rate was left unchanged and policymakers signalled an intent to maintain that restrictive stance for a "very long" period to keep inflation expectations in check.

The deceleration in the second quarter may, however, weigh on growth outlook, admitted the finance ministry.

The ministry indicated a moderate downward bias on its 2025 growth outlook, which now stands at 2.5%, given the sharper-than-expected slowdown and delayed effects from tight monetary policy.

The figure came in contrast to the strong 3.4% growth posted in 2024.

Consumption and investment trends

Household consumption, a crucial engine of economic growth, rose 0.5% in the second quarter, aided by government efforts to maintain wage gains.

However, this pace was much lower than the 1.0% growth witnessed in the first quarter, emphasising the gradual cooling noted by analysts.

Investment, measured by gross fixed capital formation, decreased 2.2% after increasing in the first quarter, as high borrowing costs impacted businesses. Government consumption also fell 0.6%.

Sector performance highlights a mixed picture

On the supply side, services—which account for nearly 70% of Brazil's GDP—grew 0.6% compared to the first quarter, aided by a still-resilient labour market.

Industrial production rose 0.5%, boosted by a 5.4% increase in extractive industries. Farming output, on the other hand, fell marginally, by 0.1%, after making a significant contribution earlier this year.

Outlook: slower but stable growth

The figures show an economy adjusting to tighter monetary circumstances, with consumption steadily decreasing, investments declining, and sector performance becoming more uneven.

While the services and extractive industries continue to give support, the overall picture signals moderation.

Economists predict Brazil's economy to remain robust but sluggish, allowing for monetary relaxation by the end of 2025.

The pace of any policy transition, however, will be determined by inflation dynamics and whether domestic demand continues to weaken without jeopardising macroeconomic stability.

At the same time, the Finance Ministry's cautious tone emphasises the balancing act that officials must perform: maintain momentum in Latin America's largest economy while keeping inflation under control following one of the fastest rate-hiking cycles in decades.