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Business News/ News / World/  Brazil slips into recession for first time in over 5 years
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Brazil slips into recession for first time in over 5 years

GDP shrank by 0.6% in the April-June period from the previous three months, after contracting a revised 0.2% in the first quarter

Brazil’s President Dilma Rousseff has attempted to revive growth with tax cuts, billions of dollars in credit and higher social spending. Photo: BloombergPremium
Brazil’s President Dilma Rousseff has attempted to revive growth with tax cuts, billions of dollars in credit and higher social spending. Photo: Bloomberg

Brasilia: Brazil’s economy slipped into recession for the first time in more than five years as investments contracted on lower confidence before the October presidential election.

Gross domestic product (GDP) shrank by 0.6% in the April-June period from the previous three months, after contracting a revised 0.2% in the first quarter, the national statistics agency said on Friday in Rio de Janeiro. The contraction in the second quarter was bigger than the median estimate of 42 economists surveyed by Bloomberg, who expected a 0.4% drop.

President Dilma Rousseff has attempted to revive growth with tax cuts, billions of dollars in credit and higher social spending. With inflation hovering around the upper limit of the target range, consumer and business confidence eroded in the run-up to the first round vote on 5 October. It’s the first time the economy contracted for two consecutive quarters since the aftermath of the global financial crisis in 2008.

“This is the last thing that Dilma would have wanted, today’s data is the worst-case outcome for her," Neil Shearing, chief emerging markets economist at Capital Economics Ltd, said by phone from London. “This is clearly going to put pressure on the central bank to loosen policy in order to support growth."

Swap rates maturing in January 2017 fell six basis points, or 0.06 percentage point, to 11.2% at 12:30 pm local time. The real rose 0.2% to 2.2379 per US dollar.

Investment Drop

Investments contracted 5.3% in the second quarter from the previous three months, accounting for the bulk of the contraction in gross domestic product, the national statistics agency said on Friday. Family consumption, still sustained by increases in wages, rose 0.3%.

Shearing cut his 2014 growth forecast to 0.2% from 1.5% after the GDP report.

“Price controls, currency interventions and regulatory changes in the energy and other industries have pushed investors to the sidelines," Mauro Rochlin, a professor of economics at the Getulio Vargas Foundation, a Brazilian business school and research institute, said by phone.

“Excess government meddling in the economy has created a very bad business environment," he said.

Above Junk

Standard & Poor’s in March lowered its debt rating on Brazil by one level to BBB-, a step above junk, on slower economic growth and what it said were deteriorating fiscal accounts. The public sector posted a 32.7 billion-real nominal budget deficit in July, the largest since December 2008, the central bank said in a report on Friday.

Finance minister Guido Mantega said on Friday that growth would fall short of the government’s 1.8% target and that it would be difficult to reach its primary budget surplus target of 1.9% of GDP. On Thursday he said the economy will grow 3% next year as the government tightens its budget, allowing the central bank to ease the severe monetary policy it implemented to slow inflation.

Jose Francisco de Lima Goncalves, chief economist at Banco Fator SA, said the economy won’t grow more than 1% next year.

“It will take time to see an economic recovery," Lima Goncalves said in a phone interview from Sao Paulo. “The infrastructure bottlenecks won’t disappear. The consumption cycle is running out."

Highest Level

The central bank on 16 July kept the benchmark interest rate unchanged at 11% for the second straight meeting after lifting it by 375 basis points in the year through April. Brazil has the highest benchmark borrowing costs among rate-setting nations in the Group of 20 (G-20).

Policy makers signalled plans to hold the key rate at the highest level in more than two years as inflation persists above the mid-point of its target even as demand eases.

Rousseff’s support fell before the elections as other candidates attack her economic policies, according to two polls released this week.

Former environment minister Marina Silva would win 45% of voters’ support in an 26 October run-off against Rousseff, who would garner 36%, according to an Ibope poll published on 26 August. The survey questioned 2,506 people on 23-25 August and had a margin of error of plus or minus two percentage points.

Silva has 43.7% support in the second round, 5.9 percentage points more than Rousseff in an 21-24 August MDA survey published on 27 August, which has a margin of error of plus or minus 2.2 percentage points.

Rousseff doesn’t have the votes needed to avert a run-off, according to both polls. Bloomberg

Dominic carey in Sao Paulo and Peter Millard in Rio de Janeiro also contributed to this story.

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Published: 29 Aug 2014, 09:40 PM IST
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