Brazil’s Biggest Bank Now Forecasts Two-Year GDP Contraction

Itau Unibanco SA is now forecasting Brazil’s economy will contract for a second consecutive year as unemployment continues to rise and the government struggles to contain above-target inflation.

Brazil’s largest bank reduced its forecast for next year’s gross domestic product to a 0.2 percent contraction from 0.3 percent growth. It also predicts this year’s recession will be deeper than initially expected, with Latin America’s biggest economy shrinking 2.2 percent, instead of 1.7 percent.

President Dilma Rousseff’s administration is raising interest rates, cutting spending and increasing taxes in a bid to tame inflation, stave off a credit downgrade and restore business confidence. Finance Minister Joaquim Levy says the adjustments are necessary to pave the way for a sustainable recovery.

Ilan Goldfajn, Itau’s chief economist, is the only analyst among 33 surveyed by Bloomberg forecasting back-to-back recession. He expects unemployment to rise to 8 percent this year from 6.7 percent in May. He sees the jobless rate crawling to 9 percent in 2016.

“Leading and coincident indicators suggest that the declining trend in economic activity may last longer – and be stronger – than we expected,” Goldfajn said.

The median forecast of economists surveyed by Bloomberg is for a 1.4 contraction this year, and 0.9 percent growth in 2016.

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