Brazil Economy Nears Bottom After Shrinking for Six Quarters

  • Gross domestic product contracted 0.6% in second quarter
  • ‘Brazil edging toward a recovery,’ says PNC Bank economist

Brazil’s worst recession on record is nearing its end as Latin America’s largest economy shrank only slightly more than expected in the second quarter and investment rebounded.

Brazil’s gross domestic product contracted 0.6 percent in the three months ended in June, its sixth straight quarter of contraction, after a revised 0.4 percent drop in the previous period, the national statistics institute said Wednesday. The figure was worse than the median estimate for a 0.5 percent decline from 46 economists surveyed by Bloomberg. From a year earlier, GDP shrank 3.8 percent after a 5.4 percent drop in the previous quarter.

Signs of an incipient economic rebound are emerging as business and consumer confidence rise from historic lows. Expectations that the impeachment of Dilma Rousseff will trigger structural reforms is fueling optimism about the future of an economy that over the past two years has been battered by an unprecedented corruption scandal and a crippling political crisis. 

Investment, a key growth barometer, rose 0.4 percent in the second quarter, rebounding after ten consecutive quarters of contraction. Family spending declined 0.7 percent, while government spending dropped 0.5 percent.

“Brazil continues to edge toward a recovery,” Bill Adams, senior economist with PNC Financial Services Group, wrote in a note to clients in which he forecast the central bank should be able to start cutting interest rates in the fourth quarter of 2016. “That will create more space for consumer spending and likely allow Brazil to enter a modest recovery in 2017.”

Reform Hopes

Brazilian financial markets have rallied on prospects that Acting President Michel Temer, once confirmed in office, will pass legislation to overhaul the pension system and curb a nearly-record budget deficit that has sent public debt swelling to almost 70 percent of GDP.
The Brazilian real, the world’s best-performing currency so far this year, was little changed after the data was released.

Delaying the economic recovery is the country’s benchmark interest rate, which policy makers are widely expected to keep at a 10-year high of 14.25 percent at the end of their two-day monetary policy meeting later on Wednesday. Central bank chief Ilan Goldfajn has poured cold water on market hopes for a substantial monetary easing this year as Brazil’s inflation still runs at nearly twice the official target of 4.5 percent.

The Brazilian economy is forecast to contract 3.5 percent this year following a 3.8 percent decline in 2015, according to economists polled by Bloomberg. That would mark the country’s worst recession on record. For 2017, the same economists expect modest growth of 1 percent.

That will be insufficient to significantly improve a labor market that has shed 1.8 million jobs over the past 12 months, fueling a vicious cycle of falling tax revenues and growing budget deficits.

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