FILE PHOTO: A drone view shows the Central Bank headquarters building during sunset in Brasilia, Brazil, June 11, 2024. REUTERS/Adriano Machado/File Photo

By Marcela Ayres

BRASILIA (Reuters) -Brazil's economy lost momentum in the second quarter but still outperformed market expectations, driven by resilient services activity and gains in the extractive industry, official data showed on Tuesday.

Gross domestic product in Latin America's largest economy grew 0.4% in the April-to-June period from the previous quarter, statistics agency IBGE said, above the 0.3% expansion expected by economists in a Reuters poll.

That reading marked a steep slowdown from the revised 1.3% growth reported for the first quarter, when seasonal farm output boosted performance in the agricultural powerhouse.

Gustavo Rostelato, an economist at Armor Capital, said that despite a slight upside surprise, the GDP data provided few new elements, showing a gradual slowdown in household consumption.

On a year-over-year basis, GDP expanded 2.2%, in line with expectations in the Reuters poll.

Liam Peach, a senior emerging markets economist at Capital Economics, said weaker Brazilian growth supports an improving inflation outlook that is likely to continue in the coming quarters, creating room for the central bank to begin cutting interest rates around the end of this year.

"Overall, we expect GDP growth of around 0.3% q/q in the coming quarters, with full-year growth for 2025 at 2.3%, and below 2.0% next year," he noted.

Brazil's central bank has lifted its benchmark interest rate by 450 basis points since September to 15%, near a two-decade high, and held that rate steady in July.

Policymakers signaled plans to maintain this stance for a "very prolonged" period to curb inflation as the domestic economy shows signs of moderating growth amid mixed data across sectors and indicators.

Following the release of the data, the Finance Ministry flagged a slight downward bias to its 2.5% growth forecast for this year, after the 3.4% expansion recorded in 2024, citing a sharper-than-expected second-quarter deceleration and the lagged effects of monetary tightening.

Household consumption rose 0.5% in the second quarter from the previous quarter, supported by measures from President Luiz Inacio Lula da Silva's government to sustain wage gains, though growth slowed sharply from a 1.0% increase in the previous quarter.

Investments as measured by gross fixed capital formation fell 2.2% in the second quarter after driving growth in the first quarter, pressured by high borrowing costs.

Government consumption declined 0.6%.

On the supply side, services, which account for about 70% of Brazil's GDP, expanded 0.6% from the prior three months, underpinned by a robust labor market.

Industrial production rose 0.5%, helped by a 5.4% increase in extractive industries, and farming output slipped 0.1%.

(Reporting by Marcela Ayres; Editing by Andrew Heavens, Bernadette Baum and Paul Simao)