• Despite the stagnation in the second quarter, activity was 12.4% higher than a year earlier;
• The setback for Brazil’s economic rebound came as a severe second wave of COVID-19 infections triggered restrictions in major cities during April and May.

Brazil‘s economy contracted by 0.1% in the three months to June, government statistics agency IBGE said on Wednesday, stalling more than expected as a second wave of the pandemic hurt demand.

The decline in Brazil‘s gross domestic product (GDP) from the prior quarter was worse than the median forecast for 0.2% growth in a Reuters poll and marked a sharp slowdown from 1.2% growth in the first quarter.

The setback for Brazil‘s economic rebound came as a severe second wave of COVID-19 infections triggered restrictions in major cities during April and May, weighing on household consumption and manufacturing.

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Still, more government spending and services activity helped avoid a wider downturn, offsetting a drop in fixed investments and weaker agricultural output.

As vaccination gathers steam and case counts continue to fall, expectations have gathered of a more than 5% rebound for Brazil‘s GDP this year.

Despite the stagnation in the second quarter, activity was 12.4% higher than a year earlier, when the onset of the pandemic hammered Brazil‘s economy. Economists had expected a 12.8% rise.

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Inflation has also surged during the recovery, triggering aggressive interest rate hikes by the central bank and weighing on the outlook for next year, when President Jair Bolsonaro faces an uphill battle to win re-election.

That has stirred concerns in markets that Bolsonaro could ramp up government spending next year to win back popularity, bending fiscal rules and hurting efforts to stabilize public debt.