Brazil on course for worst recession in century

A woman walks past a boutique in Rio de Janeiro.
A woman walks past a boutique in Rio de Janeiro.PHOTO: REUTERS

RIO DE JANEIRO (AFP) - Brazil's economy shrank by 3.8 per cent in 2015, the government said on Thursday, with the biggest contraction in 25 years set to push the Latin American giant into its worst recession for more than a century.

The latest gloomy news from Brazil was no surprise, but the severity underlined the depth of problems facing President Dilma Rousseff's government as it battles both declining economic output and 10.67 per cent inflation.

The state statistics office said 2015 registered the worst single annual fall in gross domestic product (GDP) since 1990, a year when the economy dipped 4.3 per cent.

With the International Monetary Fund predicting a further 3.5 per cent shrinkage this year, Brazil appears to be well into a recession that would be worse than any on government record going back to 1901.

The GDP results shove Brazil into the bottom bracket for performance in Latin America, where it is easily the biggest economy. Only Venezuela, with what the IMF estimates was a 10 per cent plummet in GDP, is worse off.

Leading Brazil's slide was the industrial sector, which was down 6.2 per cent in 2015. In the last quarter of 2015, the all-important mining sector was down 6.6 per cent, reflecting the worldwide slump in commodity prices and demand for Brazil's iron ore and other raw materials.

Services were down 2.7 per cent for the year.

Brazil's ugly GDP picture is only part of a wider economic and political mess amounting to a stunning fall from grace.

The country of 204 million people was only recently being touted as the emerging markets giant that had finally found its feet - with the Olympic Games due to take place in Rio this August symbolising that new status.

GDP grew steadily through the 2000's, except for a dip after the last 2008 global financial meltdown, hitting 7.5 per cent growth in 2010, 3.9 per cent in 2011, 1.9 per cent in 2012 and 3 per cent in 2013.

The leftist government's generous spending programmes were credited with lifting millions out of severe poverty, while Chinese demand for the country's mineral and agricultural riches paid the bills.

The party has now come to a brutal end and Rousseff - beset by an impeachment attempt and a huge, volatile corruption scandal that has sucked in many top political and business figures - appears to have few options.

On Wednesday, the Central Bank maintained its benchmark interest rate at 14.25 per cent, but that has not stopped inflation hitting double digits, while unemployment is now at 7.6 per cent and rising.

The slump has made Brazil increasingly toxic on the investor landscape. Last week, Moody's became the third big credit rating agency to downgrade Brazil to junk status, warning of slow recovery and political uncertainty.

A Markit Brazil Services survey of the private sector released on Thursday found a record contraction in economic activity in February, as "companies continued to link the adverse operating environment to the ongoing economic, financial and political crises."

"The Brazilian economic downturn took a real turn for the worse in February, as the financial and political difficulties in the country drove down output and led to reduced order intakes," said Rob Dobson, author of the report.

"The domestic market is especially weak" and "the labour market also appears to be in dire straits."

Brazilian economists warn that 2016 could turn out to be worse than the IMF's prediction, with the economy shrinking even more than in 2015.

"Brazil has never had such a high level of uncertainty and this is freezing everything up. There is no consumption or investment or credit with this historic level of uncertainty," Daniel Cunha, an analyst at XP Investimentos in Sao Paulo, said.