No Brazil Rebound in Sight Even as Temer Tackles Budget Gap

  • Higher industry, consumer confidence have yet to spur growth
  • From services to agriculture and investment, all sectors fell

When Michel Temer took the reins of Brazil in May, markets rallied on expectations he would pull the nation from its worst two-year recession on record. Six months later, they’re still waiting.

His administration made its biggest advance yet in fixing the country’s battered public coffers by pushing a spending cap bill through the Senate in a first vote on Tuesday night. Yet GDP data published on Wednesday show not only a seventh straight quarter of contraction but also no sign that a recovery is near.

After two years of political uncertainty during which Temer’s predecessor was impeached and a massive corruption probe put dozens of executives and politicians behind bars, many consumers and investors are still licking their wounds, preferring to deleverage rather than take on new debt.

“This is a balance sheet recession,” said Carlos Kawall, chief economist at Banco Safra in Sao Paulo. “People saw confidence recovering and inventories falling, and that perhaps leading to some pickup in production. That was the wrong view.”

At the height of Brazil’s expansion in 2010, global demand for commodities continued to fuel exports such as iron ore and soy, while cheap credit drove an emerging middle class to buy cars, houses and fridges en masse.

Today, double-digit interest rates, a gaping budget deficit and household indebtedness are impairing investors, the government and consumers from helping fuel growth.

“The diagnosis today is that getting out of this recessionary cycle will be slower, more gradual, and more tragic,” Carlos Langoni, a former central bank chief, said at an event on Nov. 23.

From services to household consumption and even Brazil’s competitive agriculture, all sectors of the economy fell in the third quarter. Investment dropped 3.1 percent and is now down 13.5 percent over the past year, according to data published by the national statistics institute on Wednesday.

The prospect of sharper U.S. rate increases following the election of Donald Trump in the U.S. led traders to pare bets the central bank will accelerate the pace of easing monetary policy at its rate decision on Wednesday. Falling swap rates on Wednesday didn’t change bets that the central bank will cut the base Selic rate by only 25 basis points after markets close.

All that adds up to a weak recovery next year. Analysts in a weekly central bank survey have reduced their outlook for six straight weeks to under 1 percent. The Organization for Economic Cooperation and Development this week forecast stagnation in 2017.

The recovery, which the government had initially forecast for the end of this year, may not happen until the second half of 2017, according to Langoni. Gilberto Peralta, the CEO of General Electric in Brazil, agrees. “It will take some time. The wreckage to the economy was very large,” Peralta said.

Waiting longer for growth after a contraction of 3.85 percent last year and an expected 3.5 percent this year, is certain to prolong discontent among many voters struggling to make ends meet in the face of record-high unemployment and falling real wages. Austerity measures have prompted protests in Rio de Janeiro and elsewhere as many civil servants won’t be receiving their customary year-end bonus.

“If you don’t see the economy showing signs of stabilization and starting to recover relatively soon, it opens the floor to criticism by the opposition and society,” Alberto Ramos, chief Latin America economist for Goldman Sachs Group Inc., said by phone.

— With assistance by Anna Edgerton, and Matthew Malinowski

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