GDP grew 1.4% in the first quarter, but the economy will face more challenges from now on

The Brazilian economy demonstrated vigor in the first quarter of 2025, with GDP registering growth of 1.4% compared to the last three months of 2024 and 3.5 % in 12 months, according to data from the Brazilian Institute of Geography and Statistics (IBGE). The positive performance was driven mainly by the strength of agribusiness and the robustness of domestic demand.

The agricultural GDP grew 12.2% in the first quarter compared to the previous quarter and 10.2% compared to the same period in 2024, driven by the good harvest. The most recent figures from the National Supply Company (Conab) indicate a harvest of 332.9 million tons – an increase of 11.9% compared to the previous one, which had been hampered by adverse weather conditions.

Soybeans stood out as the main crop in the field, with an expected 14% increase in this year's harvest. By the third week of May, 99.1% of the oilseed had already been harvested, according to data from Conab, with only small areas remaining in Maranhão, Piauí, Santa Catarina and Rio Grande do Sul.

Services saw slight growth in the first quarter - 0.3% -, practically registering the pace of the last quarter of 2024. The performance was driven by information and communication services, which saw a 3% expansion in their activity, and real estate activities, with 0.8%.

Outlook points to gradual cooling of Brazilian GDP in 2025

Despite the promising start driven by agribusiness and services, analysts project a gradual slowdown in economic activity throughout 2025. The Central Bank's Focus Bulletin released on Monday (26) indicated that the median projection for GDP growth this year is 2.14%.

Itaú's indicators for April show signs of a sharper slowdown, especially in the services and credit-dependent trade sectors. Seasonal factors, such as the extension of holidays in some states, may also have contributed to this trend.

The main factor behind the cooling projections is the lagged effect of the interest rate hike, which began in September 2024. At the last meeting of the Monetary Policy Committee (Copom), there was an increase of 0.5 percentage points, raising the Selic rate to 14.75% per year – the highest level since 2006.

The cycle of rising interest rates may have come to an end. Options contracts traded on B3 on Thursday (29) indicated a 74% probability of maintaining the rate at the next Copom meeting, scheduled for June 17 and 18. This expectation is in line with the median of projections from banks, brokers and consultancies indicated in the Focus bulletin.

Analysts indicate that the first cuts to the Selic rate should occur, at best, at the last meeting of the year, in December. Maintaining high interest rates aims to control inflation and anchor expectations that are still out of line with the 3% target.

Labor market sustains demand and helps contain GDP slowdown

Domestic factors are helping to contain the economic slowdown. Although the creation of formal jobs fell 4.5% in the first four months compared to the same period in 2024, according to the General Registry of Employed and Unemployed Workers (Caged), unemployment has declined. After four consecutive months of growth, the rate fell to 6.6% in April – the lowest rate for that month since the beginning of the historical series in 2012.

Real wages (after inflation is discounted) registered strong growth of 6.1% in April compared to the same month in 2024, according to the IBGE, marking the fourth consecutive year of improvements in remuneration.

Government initiatives, marked by the populism of President Luiz Inácio Lula da Silva (PT), also contribute to keeping activity buoyant. The release of FGTS balances and the creation of the "new private loan" are examples of these measures.

The new loan, by expanding competition and the universe of formal workers with access to credit, tends to reduce interest rates and increase the average terms of personal loans – an effect similar to the original loan from 2004. XP Investimentos estimates that this measure, by freeing up income previously committed to debt service, could add up to 0.6 percentage points to GDP growth between 2025 and 2026.

The main effect of this dynamic is the difficulty for inflation to decline . The IPCA accumulated over 12 months reached 5.53% in April – the highest since 2023. Economists at Bradesco project that the reduction should only occur from August onwards.

External uncertainties are challenges for projections

The global scenario presents risks for the Brazilian economy, especially related to US trade policies. Unlike the first Trump administration, the targets of the tariffs now include virtually all world economies, not just China, significantly increasing uncertainty.

Although the direct impact of tariffs on the Brazilian economy is considered small – given the country’s relative closure to foreign trade –, the indirect effects are significant. The synchronized global slowdown and volatility in commodity prices are the main transmission channels.

Market consensus points to a slowdown in global GDP in 2025 (projected at 2.8%, below the historical average of 3.4%), but without configuring a recessionary scenario. XP Investimentos highlights that the fall in the prices of commodities such as metals, energy and especially oil tends to negatively pressure the Brazilian economy.

The dollar exchange rate reflects the global situation, with the real being influenced predominantly by external factors. The recent global weakening of the US dollar, combined with the high interest rate differential in Brazil, favors the appreciation of the Brazilian currency.

However, factors limit these potential gains: the continuation of "American exceptionalism" (stronger growth in the US), domestic fiscal uncertainties and unfavorable dynamics of external accounts. Projections for the exchange rate at the end of 2025 are between R$5.70 and R$5.80 per dollar.