- Venezuela worst performer in world with 10.1% contraction call
- Latin America to suffer first back-to-back recession in 30 yrs
The World Bank forecast Brazil’s recession will extend into a third consecutive year, while Venezuela takes the world’s deepest plunge in 2016. The two will drag Latin America into back-to-back economic contractions for the first time in more than three decades.
Brazil will contract 4 percent in 2016 and 0.2 percent next year, with the 2017 outlook revised from a prior forecast for a 1.4 percent expansion. Venezuela’s economy is seen shrinking 10.1 percent this year, more than double the multilateral’s prior estimate and the worst performer among all countries tracked by the World Bank.
Lower international commodity prices have torpedoed Venezuela’s economy and hampered Brazil’s recovery, weighing on Latin America’s prospects in general. Brazil is laboring to pull itself from its worst downturn in decades, with Acting President Michel Temer seeking to shore up government accounts and investor sentiment by implementing austerity measures and reforms. Venezuela’s Nicolas Maduro is clinging to power amid growing street protests and economic meltdown.
The recessions in Brazil and Venezuela “have yet to bottom out and could last longer than expected due to political uncertainties and continued macroeconomic imbalances,” the World Bank said in its report. “There is additional risk that they may spill over to other countries in the region.”
The bank’s 2017 outlook for Brazil is worse than all but four forecasts from 34 economists surveyed by Bloomberg. It is also lower than that of fellow multilaterals, including the International Monetary Fund and the Organization for Economic Cooperation and Development which forecast stagnation for next year. The IMF an the OECD forecasts were made before the release of first-quarter GDP data last week that contracted less than almost all analysts estimated.
Brazil’s positive first-quarter surprise was in part driven by a surge in government spending preceding the suspension of Dilma Rousseff, which casts doubt on whether there’s a real turnaround in the economy. Cabinet members resigning mere weeks into Temer’s administration and the prosecutor general targeting the Senate president may limit his ability to pursue sweeping measures.
“In Brazil, political uncertainty might delay the approval of key policy initiatives needed to regain investors’ confidence,” the World Bank said. “Counter-cyclical fiscal and monetary policies may be harder to implement when investors focus on rising uncertainty and the potential for political tensions to block structural reforms.”
The World Bank’s outlook for Venezuela is likewise more pessimistic than consensus, and in fact below that of all economists surveyed by Bloomberg in mid-May. Inflation last year was 180 percent, and it will “increase multi-fold in 2016,” the report said, without providing a specific outlook. The nation’s “recent 6,000 percent jump in petroleum pump prices and further monetizing of the public sector deficit are likely to continue contributing to inflationary pressures, weighing on output,” according to the report.
Latin America as a whole will decline 1.3 percent this year, following a 0.7 percent contraction last year -- marking the first back-to-back years of recession in more than 30 years. Were it not for Brazil, the region would grow by 0.5 percent, according to the World Bank report. The multilateral lender previously forecast regional stagnation in 2016.