Brazil stagnates in 2014, recession looms for 2015

RIO DE JANEIRO (AFP) - The Brazilian economy, the world's seventh-largest, posted near-stagnant growth in 2014, expanding just 0.1 per cent, and will likely enter recession this year, officials said Friday.

Hosting the World Cup in June and July and gearing up for the Olympics next year failed to reverse the drag of rising inflation, a ballooning deficit and a US$4 billion (S$5.5 billion) kickbacks scandal at state oil giant Petrobras that has tarnished Brazil's largest company and President Dilma Rousseff's party.

It was the fourth year of lacklustre growth for the South American giant, whose economy expanded 2.7 per cent in 2013, 1.8 per cent in 2012 and 3.9 per cent in 2011, under a revised calculation system that took effect this month.

Rousseff has never managed to match the blistering 7.6 per cent GDP growth Brazil posted in 2010, the last year in office of her charismatic predecessor and mentor, Luiz Inacio Lula da Silva.

The central bank is expecting an even worse year in 2015, forecasting a contraction of 0.5 percent.

"Looking forward, the questions are how deep will the recession be in 2015, when will Brazil start to recover and how fast," said Robert Wood, Brazil analyst at the Economist Intelligence Unit.

Analyst Alex Agostini, chief economist at Brazilian firm Austin Rating, predicted modest growth of around 1-2 per cent in 2016 before a return to stronger growth of about 2.5 per cent in 2017.

"There's been a breakdown in recent years from the inflationary, fiscal and exchange-rate standpoint," he told AFP.

Agostini predicted India, whose economy is growing at an annual rate of more than 7 per cent, would surpass Brazil this year as the world's seventh economy.

Of the Brics group of emerging economies - Brazil, Russia, India, China and South Africa - Brazil posted the lowest growth for 2014.

Russia's economy grew 0.6 per cent, China's 7.4 per cent and South Africa's 1.4 per cent.

Brazil, the largest economy in Latin America, also had the poorest GDP growth in the region outside crisis-hit Venezuela.

UPHILL BATTLE

Despite the slowdown, Brazil's economy grew more than forecast: analysts had predicted the figure would come in at zero, and the central bank had predicted a 0.1 per cent contraction.

In the fourth quarter of 2014, the economy contracted 0.2 per cent, said national statistics institute IBGE.

Industry, the hardest-hit sector, contracted by 1.2 per cent in 2014. Agrobusiness expanded by 0.4 per cent and services by 0.7 per cent.

Brazil's central bank is forecasting annual inflation of 7.9 per cent for 2015, well above its target of 4.5 per cent. It has raised the key interest rate to 12.75 per cent in a bid to rein in prices, but that also weighs down economic activity and investment.

Other drags on the economy include a current account deficit of US$6.9 billion, a trade deficit of US$2.8 billion and a weak currency.

Even unemployment, long the indicator Rousseff's left-wing government could point to as a measure of success, has crept up since the start of the year, reaching 5.9 per cent in February.

The scandal at Petrobras has also dented confidence.

Some of the country's largest construction firms stand accused of colluding with Petrobras executives to massively inflate contracts, passing much of the dirty cash to politicians from Rousseff's party and its allies in Congress.

Rousseff, who chaired the Petrobras board during much of the period under investigation, has not been implicated in the graft. But the scandal has become a major crisis just months into her second term, which began on Jan 1.

Rousseff's approval rating has plunged to 13 per cent, and more than 1.5 million Brazilians took to the streets this month to protest her government.

There is broad consensus that the government must get its books in order, but Rousseff's new finance minister, Joaquim Levy, faces an uphill battle to convince Congress to raise taxes and cut spending, especially amid the slowdown.

But he did score a victory this week by convincing ratings agency Standard & Poor's that the government is serious about economic reforms.

After long meetings with Levy, S&P decided to keep Brazil's rating at BBB- instead of downgrading it to junk.