Economic activity slows following record-breaking harvest

The Central Bank’s Economic Activity Index (IBC-Br), often viewed as a GDP proxy, fell 0.74% in May from April on a seasonally adjusted basis. The result, released on Monday, was below even the most pessimistic forecasts compiled by Valor Data—Valor’s financial data provider—which ranged from a 0.5% contraction to a 0.5% expansion, with a median of -0.1%. The unexpected drop has prompted analysts to revise down their 2025 growth forecasts.

In April, the IBC-Br had posted a marginal increase of 0.05% (revised from 0.16%). Over the 12 months through May, the index rose 4.04%.

“The weakness in activity was broad-based, with monthly declines in agriculture (-4.25%) and non-agricultural sectors (-0.31%). Industry contracted 0.52% while services were flat, up just 0.01%,” wrote Alberto Ramos, chief economist for Latin America at Goldman Sachs, in a note to clients. According to his estimates, the statistical carryover for second-quarter growth dropped from 0.83% in April to 0.16% in May.

Rafaela de Sousa, an economist at BuysideBrazil, pointed out that this was the first monthly decline of the year for both the overall index and its non-agricultural component, reinforcing the narrative of weak activity in the second quarter. She warned that this is an important risk to monitor, given the potential impact of the U.S. tariffs.

BuysideBrazil maintains a 2025 GDP growth forecast of 2.3% but estimates that tariffs could affect up to 30% of Brazil’s exports to the U.S. Under that scenario, the economy could lose as much as 0.6 percentage point of GDP over a 12-month period, with most of the drag occurring in 2026, said Ms. de Sousa.

XP Investimentos also sees downside risk to its current forecast of 2.5% GDP growth. According to the firm, Mr. Trump’s tariffs alone could shave up to 0.3 percentage point from growth this year.

Despite the recent data, economist Rodolfo Margato said the labor market and fiscal stimulus, whose effects have yet to show up in the numbers, should help prevent a sharp downturn in domestic activity. He calculates that May’s IBC-Br result leaves a 0.2% statistical carryover for the second quarter, and expects the index to close the period with a 0.3% gain, close to XP’s GDP projection of 0.4%.

Oxford Economics revised its 2025 growth forecast to 2.2% from 2.5%. Still, economist Felipe Camargo does not foresee a major impact from the tariff dispute.

“Our analysis is that the effect on growth will be limited, even if Brazil retaliates. We expect the two countries to reach an agreement in the coming months, though any deal is likely to involve tariffs higher than those in the pre-Trump era,” said Mr. Camargo.

Similarly, ABC Brasil downgraded its GDP forecast for this year to 2.3% from 2.5%. “What stood out to us in the monthly and quarterly breakdown of the IBC-Br was the weaker performance of cyclical sectors, those more sensitive to interest rates,” said Daniel Xavier, the bank’s chief economist. He noted that the services and industrial sectors, which faltered in the May data, also showed a deterioration in FGV’s business confidence index, suggesting further weakness may be ahead.