Service sector cools more sharply than expected

“It was the service sector that explains the slight downside deviation in our full-year GDP projection,” ABC Brasil wrote in a report. “What we see here is the lagged effect of monetary conditions.”

“It was the negative highlight from the supply perspective. The market usually tracks the sector through the PMS, which is monthly and had been showing stronger results—but it only covers part of the sector,” noted Luis Cezario, chief economist at Asset 1.

He highlights the performance of the “other services” category, which includes services provided to households, that grew only 0.1% in the quarter. Such weak performance does not line up with labor-market dynamics, he said. One possible explanation is household indebtedness, now at historic highs.

Thiago Xavier of Tendências adds that the weaker services data may reflect effects of the Brazilian Institute of Geography and Statistics’ (IBGE) historical revision. He also emphasizes the weak performance of “other services,” which, together with financial intermediation, was one of the only categories to deteriorate relative to the second quarter.

Industry grew more than expected in the quarter. Still, this does not reverse expectations of weak growth in 2025. Extractive industries and construction were the standouts.

Fiscal constraints, a Selic rate at 15%, and the 50% surtax on Brazilian exports to the U.S. are obstacles to stronger expansion of domestic industrial activity. A more robust recovery is expected only in 2027, experts say.

According to the IBGE, total industry rose 0.8% in the period. The highlight was extractive industries, up 1.7%—the fourth consecutive quarterly gain.

“This increase is largely due to aggregate demand, which re-accelerated the sector in the second half,” said Vitor Vidal, economist and founder of consulting firm VVC.

Among all segments, manufacturing is the most affected and has been “moving sideways this year,” stresses Luis Otávio Leal, chief economist at G5 Partners.

For next year, Leal expects slight improvement, driven by the beginning of interest-rate cuts and the positive effects of some goods removed in November from the U.S. 40% tariff list. “However, a real recovery will only come in 2027,” he says.

Stefano Pacini, economist at FGV Ibre, notes that even with a more favorable scenario, industrial activity will not pick up immediately because inventories remain very high.

Agriculture posted a positive performance, driven by a favorable mix of climate conditions, record harvests, recovering prices, and strong export performance. According to IBGE, agricultural GDP grew 0.4% in the third quarter compared with the second.

Growth in a third quarter is unusual because harvest activities generally end between July and September. However, over the past two years, the sector has faced delays in planting both first and second crops.

For José Carlos Hausknecht, partner-director at MB Agro Consultoria, the result was mainly boosted by recovering grain production. The sector continues to post record-level production and exports, overcoming even the effects of U.S. tariff hikes in key markets.