Brazilian Economy Rebound

The Brazilian economy has shown a strong rebound in the first quarter of 2025, with a real GDP growth of 5.7% on an annualized basis from the previous quarter. This significant growth is a notable increase from the 0.2% growth experienced in the fourth quarter of 2024. However, despite this strong start, economic growth is expected to slow down due to higher interest rates that are likely to restrain activity. The labor market, although strong, is also showing signs of easing, which could impact consumer spending. Additionally, rising trade barriers in the United States pose a downside risk to the economic outlook.

Economic Slowdown

Since the first quarter of 2025, it has become clear that the economy is slowing down. The central bank’s proxy for GDP growth, the IBC-Br economic activity index, contracted by 0.8% between April and June 2025. Furthermore, the July purchasing manager’s index for services and manufacturing indicated that both sectors were contracting over the month. These indicators suggest that the economy is experiencing a slowdown.

Consumer Spending

Consumer spending has been a driving force behind the economy’s growth over the last year and a half. In the first quarter of 2025, consumption increased by an annualized 4.2% from the previous quarter in inflation-adjusted terms. However, despite this strong quarterly performance, consumer spending was up only 2.6% from a year earlier, marking a significant slowdown compared to the 5.4% year-over-year growth seen in the third quarter of 2024.

Slowdown in Consumer Spending

The slowdown in consumer spending has become more pronounced since the first quarter. Retail sales declined in April, May, and June on a month-to-month basis, after adjusting for inflation, resulting in just 1.7% growth on a year-ago basis. This is down from 3.8% in March. The two main measures of consumer confidence fell by 7.1% and 14.8% from a year earlier in July, with consumer expectations for the future being particularly weak. This suggests further restraint in spending.

Labor Market

The labor market has been beneficial for consumers, with the unemployment rate dropping to 5.8% in June, the lowest reading since at least March 2012. The falling unemployment rate is despite ongoing increases in the labor force participation rate, which jumped from 62.2% in January to 62.5% in June.

Signs of Cooling

Despite the general strength of the labor market, there are signs that it is beginning to cool. Private sector employment growth slid from 3.6% in January to 2.7% in June. Although wage growth rose 8.9% from a year earlier in June, rising inflation has eroded purchasing power. Real wage growth rose 3.3% in June, down from 3.9% in March.

Conclusion

In conclusion, the Brazilian economy experienced a strong rebound in the first quarter of 2025, driven by consumer spending. However, the economy is expected to slow down due to higher interest rates and a cooling labor market. The slowdown in consumer spending and the erosion of purchasing power due to inflation are also contributing factors. Once inflation returns to the central bank’s target, monetary easing can begin again, potentially ushering in stronger growth. However, this is unlikely to happen this year, and the economy is expected to continue experiencing a slowdown.