Brazil Economic Rout Deepens as Investors Stay Aloof

Brazil’s economic rout deepened in the fourth quarter as investors and consumers remained on the sidelines amid government austerity measures that marked a disastrous year of corruption and recession.

Gross domestic product contracted 0.9% in the final three months of 2016, its biggest decline in a year, after a revised 0.7% drop the previous quarter, the national statistics institute said. That was worse than the median estimate for a 0.5% decline from 46 economists Bloomberg surveyed, and lower than all but four of their forecasts. For the full year Brazil contracted 3.6%.

Amid the biggest bribery scandal in the nation’s history, Brazil’s economic and political crisis has decimated both investment and consumption, while unemployment has now reached record levels. An economic recovery may remain elusive even as President Michel Temer wins investor praise for efforts to shore up Brazil’s finances, and plunging inflation allows the central bank to lower borrowing costs.

“The report confirms there is a lot of idleness in Brazil’s economy,” Cristiano Oliveira, chief economist at Banco Fibra, said by phone. “The central bank has a lot of room to accelerate key rate cuts.”

Swap rates on the contract maturing in January 2019 rose two basis point to 9.68% in Sao Paulo. Brazil’s currency, the real, gained 0.68% to 3.116 per US dollar.

Moments after the GDP figures were released, Temer vowed to push ahead with his reform agenda and highlighted some economic bright spots such as slowing inflation.

During the last three months of 2016, overall investment dropped 1.6%. It stood at 16.4% of GDP in 2016, down from 18.1% and 19.9% in the two preceding years, according to the statistics institute.

“There’s no new evidence of where the economic activity is going to come from,” Andre Perfeito, chief economist at Gradual Cctvm, said by phone. “It’s not true that lower interest rates alone make for investment.”

All in all, four of six sectors of the economy contracted in the fourth quarter, including a 0.6% decline in family consumption and a 0.8% drop in services that was its worst in more than a year, according to the statistics institute.

The fourth quarter results are a far cry from the government’s initial bets that the recovery would start at the end of 2016. With economists forecasting less than 1% GDP expansion this year, policy makers are now banking on aggressive monetary easing and a series of economic and fiscal reforms to kick start Brazil’s return to growth.