World Economy

Surprise Drop in Brazil Economic Activity

Surprise Drop in Brazil Economic ActivitySurprise Drop in Brazil Economic Activity

Economic activity in Brazil posted a surprise drop in October, after Latin America’s top economy barely struggled out of recession in the third quarter, central bank data showed on Monday.

The central bank’s IBC-Br economic activity index dropped 0.26 percent month-on-month in October in seasonally adjusted terms, well below market estimates for a 0.20 percent increase, Reuters said in a report.

The Brazilian economy has remained sluggish since 2011. Global demand for the country’s commodities has cooled, inflation has remained stubbornly high and investor sentiment soured due to repeated, government intervention in the private sector.

“This is a surprise, nobody expected a contraction in October,” said Luis Otavio de Souza Leal, chief economist with Banco ABC in Sao Paulo. “The number suggests we could have another quarter of flat growth, stagnation.”

Presidential elections in October also kept some business investments on hold for that month. After winning re-election, President Dilma Rousseff has promised to limit public spending to better control inflation and regain the confidence of investors.

Less public spending, however, could further slow an economy that briefly entered recession in the first half of this year.

A growing corruption scandal at state-run Petroleo Brasileiro SA (Petrobras) threatens to delay or reduce the oil company’s plans to invest $220 billion in the next five years, adding to the country’s economic woes, economists say.

“The fiscal adjustment will have an economic impact, but the bribery scandal at Petrobras could also make things worse,” said Leal.

A 10 percent reduction in Petrobras’ investment plan could knock 0.5 percentage points off the Brazilian economy, according to Sao Paulo-based consultancy LCA. The company may be forced to write off up to 21 billion reals ($7.9 billion) because of the scandal, investment bank Morgan Stanley said on Nov. 19.

The scandal, in which billions of dollars were allegedly paid by construction companies in bribes to win contracts at Petrobras has shaken Rousseff’s government and threatens to paralyze key infrastructure projects.

The Brazilian economy is expected to expand just 0.16 percent this year and 0.69 percent in 2015, according to the median forecast of economists in a central bank survey published on Monday.

The IBC-Br index, a gauge of activity in the farming, industry and services sectors, fell a non-seasonally adjusted 1.18 percent over the same month last year.