Brazil’s Activity Falls 0.2% in July, Marking Second Monthly Contraction

Central bank proxy shows agriculture and industry dragged growth while policy makers prepare another rate cut

Brazil's central bank activity index fell 0.2% month-on-month in July on a seasonally adjusted basis, the second consecutive monthly contraction after a revised 0.9% decline in June. Agricultural output led the weakness with a 1.2% decline, industry slipped 0.4% and services were flat. The central bank has cut its policy rate by 25 basis points at each of the last four meetings to 14%, and economists expect another 25 basis point reduction to 13.75% when policy makers announce their next decision.

Brazil’s Activity Falls 0.2% in July, Marking Second Monthly Contraction

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Key Points

Brazil's IBC-Br economic activity index fell 0.2% month-on-month in July, above the -0.1% economist forecast.
Agriculture led the monthly weakness with a 1.2% decline; industry fell 0.4% and services were unchanged - impacting sectors tied to production and exports.
Monetary easing has seen four consecutive 25 basis point cuts to the policy rate, now at 14%, with economists expecting another 25 basis point reduction to 13.75%.

Brazil's economic activity contracted 0.2% in July compared with June on a seasonally adjusted basis, according to the central bank's activity index released on Wednesday. The monthly decline was larger than the 0.1% contraction forecast in a poll of economists.

The result extends a downtrend for Latin America's largest economy - July marked the second successive month of contraction after June's activity was revised to a 0.9% decrease. High borrowing costs were cited as an ongoing drag on economic activity in the country.

The central bank's IBC-Br index, which is widely used as a proxy for gross domestic product, identified the agricultural sector as the main contributor to July's weakness, with output falling 1.2%. The industrial sector recorded a 0.4% drop, while the services sector - the largest component of Brazil's economy - held steady, showing no change for the month.

Monetary policy has been easing in recent meetings. The central bank has trimmed its benchmark interest rate by 25 basis points at each of its last four meetings, bringing the Selic rate to 14%. Despite these cuts, real rates in Brazil remain among the highest globally.

Policy makers were scheduled to announce their next rate decision later on Wednesday, with a consensus among economists for another 25 basis point reduction to 13.75%.

Commenting on the implications for policy, Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, said: "The growth data increasingly argue for lower rates; the inflation backdrop argues for getting there gradually."

On an annual basis, the IBC-Br index showed growth of 1.1% in July.

Analysts and market participants will be watching the upcoming policy decision closely for confirmation that the central bank will continue its sequence of 25 basis point cuts and for any signals on the pace of future easing. In the near term, sectors tied to interest-sensitive spending could be particularly affected by the trajectory of policy rates, while agriculture and industry will likely remain focal points in monthly activity readings.

Risks

Persistent high borrowing costs continue to weigh on overall economic activity - a risk to interest-sensitive sectors such as housing, consumer credit, and business investment.
Weakness in agriculture and industry creates uncertainty for export volumes and manufacturing output, which could further slow GDP readings.
If the central bank moves more slowly or faster than the expected 25 basis point cut, market reactions could affect financial conditions and credit availability.

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Brazil’s Activity Falls 0.2% in July, Marking Second Monthly Contraction

Key Points

Risks

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