Brazil’s Economic Activity Index Contracts Sharply in July

Brazil’s economy showed signs of slowing at the start of the second half of the year as the IBC-Br economic activity index, a key proxy for GDP, registered a sharper-than-expected decline in July.

The index fell 0.50 percent month-on-month, compared with forecasts of a 0.20 percent drop and a 0.10 percent decline in June.

The data confirm that economic momentum is softening after mixed performance earlier in the year, when household consumption, services, and retail provided only patchy support.

The downturn comes against a backdrop of easing inflation. August CPI slowed to 5.13 percent annually, with prices falling modestly month-on-month, offering households some relief.

Retail sales, however, contracted by 0.3 percent in July, and while the service sector grew 0.3 percent in the same month, the overall balance of data suggests domestic demand remains fragile.

Today’s figures also arrive after the release of the Central Bank’s weekly Focus report, where analysts continue to project inflation gradually converging toward target in 2026 but growth expectations slipping for this year.

Markets are watching whether the Selic policy rate, held at 15 percent, can begin to ease later in 2025 without destabilizing the currency.

External pressures add to the challenge. Capital outflows have weighed on the real in recent weeks, while weaker global demand and commodity price volatility remain headwinds for exports.

At the same time, a stronger U.S. dollar environment raises the cost of financing and tightens Brazil’s external conditions.

The contraction in July activity underscores the risk that Brazil’s disinflation, while welcome, is being accompanied by weakening growth.

Policymakers face a delicate balance: cutting rates too soon could unsettle markets, while waiting too long risks deepening the slowdown.