On the other hand...

BRAZIL ECONOMICS - Report 21 Jul 2025 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

Economic activity shows signs of slowing down in the second quarter, which would suggest a narrowing of the output gap. However factor utilization is moving in the opposite direction: unemployment is declining and capacity utilization on the rise.

One possible explanation for this divergence is the response lag to economic activity. Another, not necessarily mutually exclusive, hypothesis refers to the possibility of BCB overestimating potential growth, which would imply a slower reduction of the output gap than it forecasts.

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