Brazil's economic growth slows in Q2 but beats forecasts

Brazil's economic growth slowed in the second quarter as elevated borrowing costs continued to weigh on activity, though the expansion was slightly stronger than expected thanks to a robust performance from the farm sector.

Gross domestic product in Latin America's largest economy grew 0.5% in the April-June period from the previous quarter, statistics agency IBGE said on Tuesday. That was slower than the 1.1% expansion in the first quarter but above the 0.4% forecast in a Reuters poll of 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 Brazil's central bank keeps monetary policy restrictive in a bid 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, Brazil's benchmark interest rate remains at 14%, among the highest in real terms globally.

The data are also likely to draw attention ahead of the country's October presidential election, in which leftist President Luiz Inacio Lula da Silva is seeking a fourth non-consecutive term.

"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," lender Inter's Chief Economist Rafaela Vitoria said.

Agriculture led growth in the second quarter, expanding 2.8% from the previous three months on the back of strong harvests in key crops, including soybeans and coffee. Services grew 0.2%, while industry edged up 0.1%, IBGE said.

Banco BV Chief Economist Roberto Padovani warned that the agricultural sector's effects are expected to ease in the third quarter, while the impact of tight monetary policy would continue to spread through Brazil's economy.

"The third quarter should still post growth, but at a slower pace. We project a 0.2% expansion," he said.