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Brazil's GDP likely contracted again in Q1 as recession enters second year

Tuesday, May 31, 2016 - 06:57
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Brazil's economy probably shrank for a fifth straight quarter in early 2016 as an impeachment process against suspended President Dilma Rousseff paralyzed investments and pushed the country closer to its worst downturn on record.

[BRASILIA] Brazil's economy probably shrank for a fifth straight quarter in early 2016 as an impeachment process against suspended President Dilma Rousseff paralyzed investments and pushed the country closer to its worst downturn on record.

Official data due on Wednesday will likely show Brazil's gross domestic product fell a seasonally adjusted 0.8 per cent in the first quarter from the end of 2015, after a 1.4 per cent drop in the last quarter of 2015, according to the median forecast of 21 economists in a Reuters poll.

On an annual comparison, Brazil's GDP probably fell 6.0 per cent from the first quarter of 2015, following a 5.9 per cent decline in the fourth quarter.

Evidence that Brazil's economy remained in a tailspin as 2016 started would reinforce expectations of GDP contracting nearly 4 per cent for a second straight year. The recession, already the worst for Latin America's largest economy since the 1930s, could become its most severe on record if that scenario holds.

Economists expect Brazil's economy to hit bottom only in the second half of this year as a weak currency boosts exports and companies sell off excess inventories.

The Senate trial of Ms Rousseff, who stepped aside this month to face charges of breaking budget rules, will probably drag on through September, stoking political uncertainty.

"Brazil's recovery should only start in 2017. The outlook for Brazil suggests that 2016 will still be a difficult year, with unemployment weighing on household consumption, the government constraining expenditures and weak business confidence," JP Morgan analysts wrote in a presentation.

Investments probably shrank for an 11th straight quarter, possibly by more than 6 per cent on a quarterly basis, according to Itau Unibanco estimates.

The long stretch of declining investments has sharply reduced Brazil's growth potential to about 1 per cent a year, Banco Safra's chief economist Carlos Kawall estimates.

Household demand probably fell in the first quarter too, as unemployment continued to rise quickly. Sao Paulo-based consultancy MCM forecasts a 0.6 per cent quarterly drop in consumption as companies shed more than 100,000 jobs per month in the first quarter of 2016.

Exports and agricultural production were probably the only bright spots as Brazil's currency remained near record lows, economists said.

"With commodity prices improving, export prospects are expected to improve," said Dev Ashish, an economist with Societe Generale.

"However, given the sluggish global demand growth, we do not see stabilising export growth strong enough to initiate an investment cycle on its own."

REUTERS

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