Brazil's Q2 GDP Growth Slows as High Interest Rates Bite

Brazil's economy grew at a slower pace in the second quarter, as elevated borrowing costs continued to weigh on activity and household spending contracted. The data has prompted the government to signal a likely downward revision to its full-year growth forecast.

Gross domestic product expanded 0.5% in the April-June period from the previous quarter, according to statistics agency IBGE. This marks a slowdown from the 1.1% growth recorded in the first quarter, though it came in slightly above the 0.4% forecast from economists. On an annual basis, GDP rose 2.0% in the second quarter, also beating expectations for a 1.8% increase.

The figures add to evidence that economic activity is cooling as the central bank maintains a restrictive monetary policy to curb inflation. Annual inflation stood at 4.24% in mid-August, above the bank's 3% target. Although policymakers began an easing cycle in March, the benchmark interest rate remains at 14%, among the highest in real terms globally.

The Finance Ministry, which currently forecasts 2.3% growth for 2026, said it was reviewing that estimate with a downward bias. The ministry expects the slowdown to continue into the third quarter as the impact of government stimulus measures fades, before a gradual recovery in the final months of the year.

A key sign of weakening domestic demand came from household consumption, which fell 0.4% in the second quarter—its first contraction in three quarters. A resilient labor market and rising incomes may prevent a steeper downturn, but government support measures are expected to lose momentum.

"If there is no more positive signaling in economic policy after the election, and if interest rates remain restrictive for longer, the slowdown in GDP growth could be even greater in 2027," said Rafaela Vitoria, chief economist at lender Inter.

Agriculture led growth in the quarter, expanding 2.8% on the back of strong harvests in key crops including soybeans and coffee. Meanwhile, services grew 0.2% and industry edged up 0.1%. "The sectors most sensitive to the economic cycle posted disappointing results," said Rodolfo Margato, an economist at XP. "Headwinds are accumulating, and we expect activity to remain stagnant in the second half."