IMF Says Brazil Economy to Shrink 3% in 2015 on Political Crisis

  • Fund expects deeper recession in 2015 than economists predict
  • Latin America’s biggest economy to drag down entire region

The International Monetary Fund forecasts Brazil’s economy this year will contract more than expected by economists as President Dilma Rousseff’s administration is engulfed by the deepest political crisis in more than two decades.

The IMF said in its World Economic Outlook released Tuesday that Latin America’s largest economy will shrink 3 percent this year. That’s double the 1.5 percent contraction published in its July outlook, and worse than the median 2.85 percent forecast from about 100 economists in the central bank’s weekly Focus survey.

“Business and consumer confidence continue to retreat in large part because of deteriorating political conditions,” according to the report. “Investment is declining rapidly, and the needed tightening in the macroeconomic policy stance is putting downward pressure on domestic demand.”

The deepest contraction in a quarter century comes as inflation runs at more than double the official target. That’s prompted the central bank to buck international trends and raise borrowing costs to their highest since 2006, depressing consumption. Without clarity on whether Congress will allow Rousseff to cut spending, the market is pricing in more rate hikes that may further weaken activity.

Negative Spillovers

Brazil entered recession in the second quarter, with the lowest consumer and investor confidence levels in history. The nation’s currency, the real, has shed nearly one-third of its value this year -- the most of 24 emerging markets tracked by Bloomberg.

The contraction in Latin America’s biggest market will have “significant negative spillovers” into large parts of the region, the IMF said. Latin America and the Caribbean will contract 0.3 percent in 2015, versus 0.5 percent growth forecast as of July. The anticipated 0.8 percent regional growth in 2016 is down from 1.7 percent in July.

The IMF forecasts Brazil’s economy will contract 1 percent next year, in line with expectations from analysts in the Focus survey.

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