March 10 (Bloomberg) -- Brazil’s economy shrank the most on record in the fourth quarter, going against predictions that Latin America’s largest economy would be a bright spot in the deepening global recession.

Gross domestic product fell 3.6 percent in the fourth quarter from the previous three-month period as companies slashed output, the national statistics agency said today in Rio de Janeiro. The drop exceeded forecasts from all 31 analysts surveyed by Bloomberg. Latin America’s largest economy expanded 1.3 percent from the year-ago period.

The biggest quarterly contraction since the series started in 1996 may lead central bank policy makers to cut lending costs 1.5 percentage points tomorrow to bolster the economy. Analysts predict the bank will trim the lending rate to 11.25 percent, matching a record low reached in September 2007, according to the median estimate of 49 economists surveyed by Bloomberg.

“It’s amazing the speed with which Brazil got dragged down with the rest of us,” said Win Thin, emerging markets analyst at Brown Brothers Harriman & Co. in New York. “I’m sure we’ll see market expectations gravitate for more aggressive cuts.”

Following today’s report, Thin raised his forecast for a cut of 1.5 percentage points in the so-called Selic. He expects the benchmark rate to reach a record low of 8.25 percent by June.

2-Point Cut

Guilherme da Nobrega, chief economist at Itau Corretora, the brokerage arm of Brazil’s largest bank, said a 200 basis-point, or 2 percentage point, cut in the benchmark rate can no longer be ruled out.

“The slowdown is there for all to see. Things are not improving,” da Nobrega wrote in an e-mail to clients. “The avenue for rate cuts is still widening.”

The fourth-quarter contraction shows Brazil isn’t insulated from a worldwide slump, central bank President Henrique Meirelles said in a statement distributed in Brasilia.

Still, Meirelles said, the “Brazilian economy has solid, strong fundamentals.”

Industrial output plunged 7.4 percent in the fourth quarter, the worst since the last quarter of 1996. Household spending, which accounts for about 60 percent of GDP, fell by 2 percent.

The economic hardship continued in January, as industrial production plunged 17.2 percent and the jobless rate jumped the most in seven years. Economists are watching January’s retail sales report, to be published March 13, to see if a collapse in demand for Brazil’s exports is catching up with consumer sentiment.

Brazil Recession

“The question is no longer if there’s a recession or not in Brazil,” said Alvise Marino, an emerging market economist at IdeaGlobal in New York. “It’s now down to the consumer to stay resilient so the economy recovers swiftly.”

Brazil’s real strengthened 2.2 percent to 2.3334 per dollar today from 2.3861 yesterday. The yield on the interest rate future contract due January 2010, the most traded on Sao Paulo’s BM&F commodity and future exchange, fell 5 basis points to 10.11 percent.

Brazil’s economy expanded 5.1 percent last year, compared with 5.7 percent in 2007.

To contact the reporter on this story: Joshua Goodman in Rio de Janeiro at jgoodman19@bloomberg.net; Andre Soliani in Brasilia at asoliani@bloomberg.net

Last Updated: March 10, 2009 18:10 EDT