Brazil GDP Probably Shrank as Investment and Confidence Fall

Brazil’s economy probably contracted in the fourth quarter of last year as stagflation plagues the world’s second-biggest emerging market.

Gross domestic product fell 0.1 percent from the three previous months, according to the median forecast of 38 economists surveyed by Bloomberg. Output remained flat for the full year, economists estimated. The statistics institute is scheduled to publish its GDP report at 9:00 a.m. in Rio de Janeiro on Friday.

President Dilma Rousseff’s government is struggling with a combination of above-target inflation, stagnant growth, a sinking currency and a record budget deficit. With the central bank raising rates and analysts forecasting a recession this year, consumer and business confidence have plunged. To revive investment and growth, Rousseff and Finance Minister Joaquim Levy have pledged to tighten fiscal discipline.

“We’re facing a huge confidence crisis, and to assume a rebound at the end of this year or maybe next year will depend on a rebound in business confidence,” Roberto Padovani, chief economist at Votorantim Ctvm, said by phone from Sao Paulo. “If you don’t have a rebound, you’re going to have a lot of problems on the fiscal side, then the political side.”

Brazil’s Finance Ministry declined to comment on the prospect of contraction in the last quarter of 2014.

Swap rates on the contract due in January 2017 rose three basis points, or 0.03 percentage point, to 13.43 percent at 10:45 a.m. local time. The real strengthened 0.13 percent to 3.1968 per U.S. dollar.

New Methodology

The fourth quarter poses a challenge for economists who study Brazilian GDP because the statistics institute, known as the IBGE, is implementing a new methodology for its calculation. Friday will mark the first release of quarterly GDP data with the system.

“We’ve used the old methodology to present our figures, but they may come out totally different, not because of the dynamics of the economy, but because of the new methodology,” Jankiel Santos, chief economist at BESI Brasil, said by phone from Sao Paulo. “I’m in complete darkness.”

The new methodology for annual GDP data, released earlier this month for the years through 2011, boosted growth in that year to 3.9 percent from 2.7 percent. The new quarterly methodology may produce a reduction of ratios such as debt, current account and budget as a percentage of GDP, according to Alberto Ramos, Goldman Sachs Group Inc.’s chief Latin America economist.

Best Practices

The new tabulation follows recommendations of international bodies including the Organisation for Economic Co-operation and Development, International Monetary Fund and the World Bank, and brings Brazil in line with best international practice, according to Neil Shearing, chief emerging markets economist at Capital Economics Ltd. Because of the changes, the question of whether the economy last year contracted slightly or eked out some growth becomes less relevant, he said.

“The process itself of constructing GDP data is very difficult, and we need to bear that in mind when interpreting the data, but the IBGE has just added to the general uncertainty,” Shearing said by phone from London. “They’ve not helped themselves.”

Shrinking Investment

Releasing all data from the new quarterly series simultaneously -- rather than fourth-quarter data alone on Friday and the rest sometime before -- is in line with international recommendations, the IBGE’s press office said in an e-mailed statement.

Based on the existing methodology, a contraction from October to December would be the fourth decline in the past six quarters. GDP grew 0.1 percent in the third quarter, drawing Brazil out of recession.

The economy was hobbled by shrinking investment stemming from a drop in confidence, according to Goldman’s Ramos and Paulo Vieira da Cunha, chief economist at hedge fund Ice Canyon. Brazil’s business confidence as measured by the National Industry Confederation deteriorated in 2014 and declined further this year, reaching its lowest since records began 11 years ago.

Debt Levels

“We saw particularly in the fourth quarter a major, major blow to investment,” Vieira said by phone from New York. “It was the beginning of everything coming apart.”

Economists surveyed by the central bank forecast that GDP will decline 0.83 percent in 2015 and grow 1.2 percent in 2016.

Standard & Poor’s last March cut Brazil’s credit rating to the brink of junk due to slow growth and expansionary fiscal policies fueling higher debt levels.

Latin America’s largest nation posted a nominal budget deficit of 344 billion reais ($107 billion) in 2014, the biggest since records began in 1991 and more than double the deficit of 2013. Gross debt climbed to 63.5 percent of GDP at year-end and has continued rising.

Further hampering investment, interest rates have been on the rise since three days after Rousseff won re-election in October. The central bank has raised the benchmark Selic at four straight monetary policy meetings, pushing it to 12.75 percent. The highest borrowing costs in six years won’t be enough to prevent annual inflation from accelerating to 8.12 percent by year-end, according to the latest central bank survey of economists.

‘Marked Adjustment’

Faster inflation in this year’s first quarter is largely due to higher prices for regulated items such as gasoline and electricity -- one element of the government’s effort to repair its finances.

Rousseff’s new economic team has also capped spending by ministries and proposed cuts in unemployment and pension benefits. S&P affirmed Brazil’s credit rating Monday at the lowest investment grade with a stable outlook, citing a “marked adjustment in various policies” to restore credibility.

As the labor market weakens, interest rates rise and inflation accelerates, consumer confidence as measured by the Getulio Vargas Foundation has fallen to a record. On March 15, more than 1 million people took part in demonstrations against the government in cities across the country. In the aftermath, Rousseff’s approval rating fell to 13 percent, according to a Datafolha poll of 2,842 people conducted March 16-17 that had a margin of error of plus or minus two percentage points.

Whether GDP edged up or down in the fourth quarter will do little to change the basic scenario as tighter fiscal and monetary policies take hold, according to Ramos.

“The economy entered 2015 with very weak momentum,” Ramos said. “It seems that it nosedived at the beginning of the year. That’s a reflection of the acceleration of the macroeconomic adjustment that the economy needs to go through.”

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