World Economy

Brazil Faces Worst Recession in a Century

Brazil Faces Worst  Recession in a CenturyBrazil Faces Worst  Recession in a Century

Brazil’s economy contracted 5.4% in the first quarter from a year earlier, highlighting the challenge facing interim president Michel Temer as he tries to end the country’s worst recession in more than a century.

Brazil’s economy has declined for the fifth consecutive quarter in what the finance ministry described as one of the deepest recessions in the country’s history.

Official figures released showed a contraction of 0.3% in the first few months of this year compared to the last quarter of 2015, marking a 5.4% decline from the first quarter of last year, Brazil's Public Finance International reported.

However, the figures were better than many had anticipated. Craig Botham, emerging markets economist at Schroders, said: “Brazil’s first quarter GDP growth sounds devastatingly bad, but such is the state of the Latin American economy that this is actually an improvement.

“The figures were better compared both to expectations and last quarter’s performance. Still, -5.4% is hardly a cause for celebration, and 2016 will not be a banner year for the economy.”

“The breakdown of the contributions to GDP still reveals extreme weakness in key parts of the economy,” Neil Shearing, Capital Economics economist, said in a note.

The figures show this modest bump in performance was driven by growth in net exports–a result of weaker currency and lower unit labor costs–and stronger government spending in the run up to outgoing president Dilma Rousseff’s impeachment.

Economists say the once high-flying emerging market is suffering a deep recession that is starting to show characteristics of a depression.

On top of its worst recession in decades, Brazil is embroiled in a political crisis sparked by a corruption scandal that has implicated many of the country’s political top brass, including Rousseff, who has been removed from office pending an impeachment trial on charges of breaking budget rules.

Confidence Revival

The formation of a new government following Rousseff’s removal has perhaps contributed to a rebound in business confidence in the economy, with figures showing a slight boost in investment compared to the end of last year.

However, if this is correct, Botham said, the revival is “somewhat hostage to further political developments”, threatening the tentative recovery.

The new government, headed by former vice president Michel Temer, has not had an easy ride so far, with pro-Rousseff protests and the corruption scandal continuing to take casualties.

Earlier this week, Brazil’s transparency minister was forced to resign after leaked recordings suggested he was trying to derail the country’s corruption investigation.

The boost brought by increased government spending is also unlikely to continue, with Temer planning a round of austerity to help balance the books.

Goldman Sachs economist Alberto Ramos said a depression was defined as a recession that lasts eight or more straight quarters in which there is a decline in real GDP of 10% or more.

He said Brazil's recession had been running for two years and had reduced the size of the economy to the level of late 2010 with a decline in real per capita GDP of 9%.

Earlier this week, the OECD cut its growth forecasts for Brazil, stating it now expected the country’s economy to contract by 4.3% this year and unemployment to increase further.

Rate Cuts

Brazil's central bank will probably keep interest rates at their highest in nearly 10 years, a Reuters poll showed, at what is set to be the last meeting before appointed chief Ilan Goldfajn takes over to start a potentially long cycle of rate cuts.

All 43 economists surveyed expect the central bank's policy committee to hold its benchmark rate at 14.25% on June 8, for a seventh straight meeting.

Goldfajn, who headed the economic research department of Brazil's largest private sector bank, will replace Alexandre Tombini, who was criticized by many investors for slashing rates to record lows in 2012 despite stubbornly high inflation.

The main question among economists is, how extensive cuts should be. Forecasts for interest rates at the end of 2017 ranged from 9% to 12.5%.