Battered Brazil slides into recession

A stall-holder waits for customers at a food stand in Rio de Janeiro, Brazil. Unemployment in the country is at 7.5 per cent and rising and the national currency is down about 25 per cent this year against the US dollar.
A stall-holder waits for customers at a food stand in Rio de Janeiro, Brazil. Unemployment in the country is at 7.5 per cent and rising and the national currency is down about 25 per cent this year against the US dollar.PHOTO: BLOOMBERG

Bleak outlook for world's seventh-largest economy hit by political crisis, graft scandal

RIO DE JANEIRO • Brazil has slipped into recession, the government says, deepening the gloom in the world's seventh-largest economy, which is already battered by falling commodity prices, political crisis and a corruption scandal.

Gross domestic product fell 1.9 per cent in the second quarter, according to official figures out last Friday. GDP had already been down 0.7 per cent in the first quarter, the government statistics agency IBGE said, revising that figure down further from the earlier estimate of minus 0.2 per cent.

Year-on-year, the second quarter growth was down 2.6 per cent.

Brazil is now in its biggest contraction for six years and with the 2015 slump forecast to extend in a milder form through next year, economists believe it is headed for its longest recession since 1931.

Its economy has been tailing off for four years, ever since the end of a boom fuelled by commodity exports, principally to China. Falling prices of commodities have punched huge holes in the budget.

Adding to the economic malaise is a growing political crisis in which President Dilma Rousseff faces calls for her impeachment, and discontent - even among many of her own supporters - over attempts to push through austerity measures.

Ms Rousseff has dismissed talk of a growing financial crisis.

"Brazil is a strong country that will grow, will overcome the difficulties, which are momentary," the President said in a speech to inaugurate a public housing complex.

She added: "We have conquered many things. We will not allow the country to go backwards."

A huge graft investigation named Operation Car Wash has revealed a bribes-and-embezzlement scheme revolving around state oil giant Petrobras and involving politicians and senior executives.

Ms Rousseff's Workers' Party has also been dragged into the scandal, adding to political instability.

A quick economic recovery is not expected, with unemployment now at 7.5 per cent and rising and the national currency, the real, down about 25 per cent this year against the US dollar. Inflation is forecast at 9.56 per cent this year.

Friday's figures showed the steepest second-quarter shrinkage in the industrial sector, which includes the troubled oil industry centred on Petrobras, at 4.3 per cent.

This month a central bank survey of economists for the first time indicated that the contraction will continue through 2016, albeit at a shallower rate of 0.26 per cent.

"If that forecast of a fall in GDP for two consecutive years is confirmed, then it will be the worst economic performance for Brazil in 85 years. The last time that happened was in 1930-1931," said Austin Rating chief economist Alex Agostini.

Mr Andrei Perfeito at Gradual Investimentos said there is a positive side to the bad news because it also reflects attempts at painful but needed reforms.

"Brazil is making strong adjustments to hold back inflation," he said, but adding that the " problem is even more political than economic. There is uncertainty over the government's conduct and businesses are retreating".

AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Sunday Times on August 30, 2015, with the headline 'Battered Brazil slides into recession'. Print Edition | Subscribe