Brazil Economy Back in Red as Optimism Fades Under Bolsonaro
Brazil Posts First Economic Contraction Since End of Recession
(Bloomberg) -- Go inside the global economy with Stephanie Flanders in her new podcast, Stephanomics. Subscribe via Pocket Cast or iTunes.
Brazil’s activity took its first quarterly plunge since 2016 as investment tumbled further, raising the possibility that Latin America’s largest economy could slip back into recession.
Gross domestic product shrank 0.2% in the first quarter, compared with a 0.1% increase in the three months through December, the national statistics agency said Thursday. The result was in line with the median estimate from economists surveyed by Bloomberg.
Optimism that President Jair Bolsonaro would quickly unlock Brazil’s growth potential is facing the harsh reality of lengthy negotiations between Congress and his inexperienced administration. Delay in passing reforms is keeping much-needed investment at bay and, meanwhile, the economy has been buffeted by blows to production. Not even borrowing costs at an all-time low are encouraging a pick-up in consumption, which remains the only relative bright spot.
“The data is bad without a doubt, demonstrating the economy’s weakness at the start of the year,” said Luciano Rostagno, chief strategist at Banco Mizuho do Brasil. “But we have to consider some shocks that prompted a negative reading.”
First-quarter results were marred by a bad crop that caused agriculture to decline, deadly collapse of a mining dam in the town of Brumadinho that torpedoed iron ore shipments, and a prolonged recession in neighboring Argentina that is sapping demand for Brazilian car exports. Brazil’s industry contracted 2%, driven by a 6.3% drop in extractive activity-- its biggest in a decade.
What Our Economist Says
“Brumadinho was far from the only factor. The weak first quarter GDP was in line with consensus and our expectations, and underscores the feeble pace of economic recovery despite the record-low interest rates. In our view, this result should be neither market-moving nor a game-changer for monetary policy.”
--Adriana Dupita, Bloomberg’s Latin America Economist
--To read the research, click here
Investments fell 1.7% in the quarter, after a 2.4% dive in the prior period. The pace of family consumption, which accounts for nearly two-thirds of demand, slowed to 0.3% growth, following a 0.5% increase in the fourth quarter. This was the “pillar” that prevented a worse contraction, according to Claudia Dionisio, who coordinates the GDP index for the statistics agency.
Growth Dream
Economy Minister Paulo Guedes said the GDP report wasn’t a surprise, as investment has been declining for years. He predicted the economy will “take off” starting in June as reforms make progress in Congress, but warned it can get worse if the country fails to fix its finances.
“Brazil is stagnant and things could get worse if the pension reform doesn’t pass,” Guedes told reporters in Brasilia. “This dream of growth is within arm’s reach, but implementation of reforms is getting delayed.”
Brazil’s key interest rate has sat at 6.5% for more than a year and, with activity disappointing and inflation forecast to end 2019 beneath the central bank’s target, there’s increasing chatter about whether its monetary policy committee, known as Copom, could lower borrowing costs, perhaps even before passage of any legislation to change the pension system.
While first-quarter decline was partly due to temporary factors, “the early signs are that growth in the second quarter has been very weak too and there is now a real risk that the economy will slip into a technical recession,” William Jackson, chief emerging markets economist at Capital Economics, said in a report. “That could bring interest rate cuts onto Copom’s agenda.”
--With assistance from Felipe Saturnino.
To contact the reporters on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net;Rachel Gamarski in in Brasilia at rgamarski@bloomberg.net
To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Walter Brandimarte
©2019 Bloomberg L.P.