Photographer: Paulo Fridman/Bloomberg

Brazil to Post Third Straight GDP Drop as Domestic Demand Wilts

  • Recession and political gridlock have torpedoed confidence
  • Falling investment is main driver behind shrinking economy

Latin America’s largest economy probably shrank for a third consecutive quarter, as rising unemployment and higher inflation sapped domestic demand, pulling the nation deeper into recession.

Gross domestic product contracted 1.2 percent in the three months ended in September, according to the median estimate of 32 economists surveyed by Bloomberg. That would mark the first three-quarter contraction since Brazil’s statistics institute began releasing data for the series in 1996. The institute will publish its GDP report at 9:00 a.m. Tuesday.

A sprawling corruption investigation has caused political gridlock in Brasilia, delaying President Dilma Rousseff’s efforts to pass measures to fortify fiscal accounts and revive confidence. As the budget deficit has swelled, boosting threats of further sovereign downgrades to junk, the government Monday was forced to impose a partial shutdown, freezing discretionary spending. Meanwhile, the central bank has boosted borrowing costs to the highest since 2006, depressing demand and boosting unemployment, while failing to tame double-digit inflation.

“At the start of the year there was hope the country could have growth, there was hope fiscal policy would be implemented without major problems, there was hope the government could inspire confidence,” said Carlos Thadeu de Freitas Gomes, the National Commerce Federation’s chief economist. “All of that was frustrated.”

Brazil’s confidence levels are hovering just above their lowest levels in the past decade. Shoppers’ sentiment plunged as the nationwide jobless rate reached 8.9 percent in September, more than two percentage points higher than the same month last year, and inflation surpassing 10 percent is eating into real wages. Bruno Rovai, economist at Barclays Plc, expects the third-quarter drop in family spending will be even deeper than the 2.1 percent decline recorded the prior period.

“The idea that consumers might not have income to service debt in the years to follow I think is what terrifies them,” Rovai said by phone from New York. “Even if there is a recovery of sentiment, we believe the labor market will continue suffering throughout the next year, and that will hold down household consumption.”

To slow consumer price increases, the central bank has nearly doubled the benchmark rate since 2013, to 14.25 percent. That’s prompting companies to hold off on taking new loans as the state development bank also reduces subsidized credit.

In an earnings call last month, 3M’s President and CEO Inge Thulin said Brazil may remain a challenge for the next two years, and was a focus of company restructuring. A drop in purchases of Whirlpool’s appliances left Brazil contributing less than 10 percent of global sales, which helped push Latin America’s share to 14 percent in the third quarter, down from 23 percent in the same quarter last year.

“There’s really no clear economic recovery in sight,” General Motors’s CEO Mary Barra said Oct. 21.

Main Driver

Investment should fall about 5 percent in the third quarter and will be the main driver behind the overall GDP decline, according to Alexandre Schwartsman, a former central bank director and managing partner at Schwartsman & Associados. Investment has plunged over eight straight quarters, including an 8.1 percent tumble in the three months ending in June that was the largest in more than six years.

The investigation of kickbacks at state-run oil producer Petrobras is dimming the outlook for a better business climate and the government’s fiscal accounts. The Nov. 25 arrest of the government’s Senate leader for allegedly seeking to interfere with investigations has put President Dilma Rousseff’s economic agenda back on the sidelines, according to Andre Cesar, a Brasilia-based political analyst.

Rousseff issued a decree Monday freezing discretionary expenditures, which may ramp up pressure on lawmakers to vote on the government’s new 2015 primary budget target for a deficit.

With her government struggling to win approval for austerity measures in Congress, Brazil had its sovereign debt rating cut at all three major ratings companies during the third quarter. Moody’s and Fitch Ratings reduced Brazil to the lowest investment grade, while Standard & Poor’s cut Brazil to junk after seven years of investment-grade ranking. S&P cited deterioration of Brazil’s fiscal position, political challenges to shoring up government finances, and economic weakness.

Pronounced Plunges

A “glimmer of hope” for growth is that fixed investment declines should begin to ease following such pronounced plunges, according to Neil Shearing, chief emerging-markets economist at Capital Economics.

“A lot of the bad news is now known, as it were, and I wouldn’t necessarily expect for business spending to be cut at the same pace next year,” Shearing said by phone from New York. “Simply by that happening, that lessens the drag on GDP.”

Still, there are two more quarterly contractions in store, followed by three of near stagnation, according to the median estimate of five economists surveyed by Bloomberg. That will lead Brazil’s economy to shrink 3.19 percent this year and 2.04 percent in 2016, according to the median estimate of about 100 economists surveyed by the central bank. Growth was expected in both years at the outset of 2015.

“We might be in the position in the first quarter of next year that the worst is behind us,” Barclays’s Rovai said. “But still nothing positive would lie ahead.”

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