Is Brazil's economy set to experience a slowdown?

The Brazilian economy posted a better-than-expected performance in the second quarter of the year, but analysts believe that activity is set to slow in the coming months.

The country's GDP grew 1.2% in the second quarter compared with the first quarter and was up 3.2% year-on-year, national statistics bureau IBGE reported on Thursday. 

The growth took place thanks to the positive performance of the industrial and services sectors, but indicators suggest that will not be repeated in the next few months. 

"We expected a weaker economic scenario this year, given the central bank's interest rate hikes, but some government measures, such as the increase in social programs and a reduction in fuel taxes, have given a boost to economic activity," Alex Agostini, chief economist at local ratings agency Austin Rating, told BNamericas.

"However, the economic weakness that was expected in the second half of this year will become clearer next year," added Agostini, who expects GDP to grow 2% this year and only 0.1% in 2023.

Brazil's central bank has aggressively raised its benchmark Selic interest rate to fight inflation. At the beginning of last year the reference rate was at just 2%, the lowest level ever, but is now at 13.75%.

The impact of this aggressive increase has not yet been felt on consumption since President Jair Bolsonaro increased the payments made to low-income families under the Auxílio Brasil social program and also ordered the reduction of gasoline taxes, limiting increases in fuel prices.  

The central bank is expected to make at least one more interest rate hike this year, which will cause an additional impact on economic activity next year.

"The stronger-than-expected 1.2% q/q rise in Brazilian GDP in Q2 has prompted us to revise up our 2022 GDP growth forecast to an above-consensus 2.5% (previously 2.0%). And the likelihood of a final 25bp rate hike (to 14.00%) in the current tightening cycle has increased. But the economy is likely to soften over the second half of the year and growth in 2023 will probably average a sluggish 0.8%," the economic team at Capital Economist wrote in a research report.