Economic growth defies challenges and powers through in Q1

Economy expands for 15th quarter running: The Brazilian economy charged through Q1, with GDP growth accelerating to 1.4% on a seasonally adjusted quarter-on-quarter basis, up from a downwardly revised 0.1% in the fourth quarter of last year. The reading marked the best result since Q2 2024, was in line with market projections and tallied the 15th straight expansion—the longest streak since the current GDP series began in 1996. On an annual basis, economic growth slowed markedly to a one-year low of 2.9% in Q1, down from the previous quarter's 3.6% expansion.

Red-hot labor market, rising wages and strong agricultural sector drive upturn: In expenditure terms, the quarterly upturn reflected improvements in private consumption, fixed investment and exports. Domestically, private consumption increased 1.0% in the first quarter, which contrasted the fourth quarter's 0.9% contraction. A hot labor market and resultingly higher wages outweighed higher inflation, driving the rebound. Moreover, fixed investment growth accelerated to 3.1% in Q1, compared to the 0.7% increase in the prior quarter despite interest rates being at a near two-decade high. Less positively, government spending growth nearly halted, decelerating to 0.1% (Q4: +0.5% s.a. qoq). Turning to the external sector, exports of goods and services increased 2.9% on a seasonally adjusted quarterly basis in Q1, which was above the fourth quarter's 1.2% contraction. Meanwhile, imports of goods and services growth picked up to 5.9% in Q1 (Q4: +0.7% s.a. qoq), marking the strongest reading since Q2 2024. Looking at sectoral data, the agricultural sector expanded a seasonally adjusted 12.2% quarter on quarter (Q4: -4.4% s.a. qoq), and growth of the services sector—which accounts for roughly 70% of GDP—improved to 0.3% from 0.2%.

Momentum to cool notably ahead: After a stellar performance in Q1, the economy should lose notable steam in the rest of the year; sequential GDP growth is seen nearly four times smaller in Q2 than in Q1, and then slowing to a near-halt in Q3–Q4. Overall in 2025, GDP growth is projected to ease to the slowest since the pandemic-induced contraction in 2020. Above-target inflation and elevated interest rates will hurt private consumption and fixed investment growth. That said, GDP growth will be supported by a strong rebound in the agricultural sector, though extreme weather events remain a key downside risk. Factors to watch include the impact of the government’s fiscal policy on inflation, investor sentiment and the Brazilian real.

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