Cityscape of downtown Sao Paulo, Brazil January 13, 2025. REUTERS/Jorge Silva

By Gabriel Burin

BUENOS AIRES, Dec 2 (Reuters) - Brazil's economy is predicted to have expanded modestly in the third quarter, weighed down by a seasonal drop in agricultural output, a Reuters poll showed.

Gross Domestic Product probably increased 0.2% in the July-September period, according to the median estimate of 23 economists polled between November 26 and December 1.

That would mark a slowdown from 0.4% in the second quarter, in line with expectations that the economy would cool going into 2026. In yearly terms, growth was seen decelerating to 1.7%, from 2.2% in the second quarter.

Official data are scheduled for release on Thursday.

"Industry is the sector of the economy showing the weakest dynamism, both year-to-date and quarter-to-quarter, due to high interest rates and tariffs imposed by the U.S.," said Rafael Prado, economist at GO Associados.

"Agriculture follows a similar slowdown trend, but due to seasonal factors, while services are expected to lose momentum due to weaker household consumption, despite a still strong labor market," he added.

HIGH BORROWING COSTS

After a brief rebound in August, Brazil's industrial production resumed a negative trajectory in September amid high borrowing costs.

The central bank's wider leading indicator that tracks activity across all sectors fell 0.9% in the third quarter from the previous three months, with a 3.0% increase in the 12-month period.

Although quarterly trends of this index may differ from GDP readings, analysts anticipate at least some of its recent weakening to be mirrored in Thursday's figures.

On the demand side, household consumption was expected to have moderated but private investment benefited from the import of an oil platform in the third quarter, Goldman Sachs analysts wrote in a report.

Retail sales, a proxy for private spending, fell again in September following a recovery in the previous month as Brazilian consumers faced higher interest rates on credit card balances.

Softer conditions in Brazil's main street stand in contrast with a rally in domestic stocks that pushed the benchmark index to a record high last week.

Looking ahead, Latin America's biggest economy is forecast to keep running at a moderate pace before next year's presidential vote, when President Luiz Inacio Lula da Silva will seek reelection.

Growth was getting support in the current quarter from "a resilient labor market backdrop and the shift to an expansionary fiscal stance", Goldman Sachs analysts noted.

Lula said on Sunday an income tax reform he signed into law in November would inject 28 billion reais ($5.25 billion) into the country's economy next year.

(Reporting and polling by Gabriel Burin; Editing by Alex Richardson)