Recovery Eludes Brazil Economy After Biggest Dive in 25 Years(2)

Latin America’s largest economy shrank the most in a quarter century last year and no recovery is in sight as shriveling demand and political crisis pummel activity.

Brazil’s gross domestic product contracted 1.4 percent in the three months ended in December, after a 1.7 percent drop the previous quarter, the national statistics institute said Thursday in Rio de Janeiro. While the figure was better than the 1.6 percent decline estimated by 47 economists surveyed by Bloomberg, it wasn’t enough to prevent Brazil’s GDP from sinking 3.8 percent in 2015. That was greatest plunge in 25 years, according to data from the government’s economic research institute IPEA.

“There’s nothing to celebrate in these GDP figures,” Luciano Rostagno, chief strategist at Banco Mizuho do Brasil, said by phone. “There is no reason to expect the economy will rebound. Investment and industry activity are expected to remain weak, and the outlook for private consumption remains bleak on back of job and credit market conditions.”

Investors have been holding back as political uncertainty swirls amid a sweeping corruption investigation and the central bank holds interest rates at their highest since 2006. A weakened currency has helped improve the competitiveness of exporters, which the government has said will help spur Brazil’s recovery. Still, joblessness is on the rise, inflation is in double-digits and both companies and the government are receiving downgrades.

Investment Plunge

Fourth-quarter investment plunged 4.9 percent -- its seventh consecutive drop -- as family consumption fell by 1.3 percent. The latter was slightly better than anticipated, according to Jankiel Santos, chief economist at Haitong in Sao Paulo, and Edward Glossop, emerging-market economist at Capital Economics Ltd.

“Private consumption did fall at a slower pace, and that could be another reason why the economy performed better than it did in the previous quarter,” Glossop said by phone from London. “But it’s still four consecutive quarters of decline, so nothing to cheer about. ”

Net exports also contributed positively to the fourth-quarter result, but mainly because of a 5.9 percent drop in imports, according to Banco Mizuho’s Rostagno. Exports fell 0.4 percent.

The Finance Ministry said the economy may stabilize in the third quarter and rebound by the end of the year as the government focus on initiatives to boost investment, expand credit and keep jobs. “The main challenge at the moment is to recover internal demand,” it said in a statement.

Elusive Recovery

Consumer and investor confidence levels have rebounded this year from record lows, which would normally suggest that the economy is bottoming. However, private-sector credit problems signal there’s no turnaround in sight just yet, Carlos Kawall, chief economist at Banco Safra, said by phone from Sao Paulo.

“This is a big difference compared to prior crises,” Kawall said. “This will prevent the bottom from being as soon as the confidence indicators are suggesting, and poses downside risks.”

Brazilian courts granted more than 5,500 Bankruptcy filings in 2015, the most since 2008, according to Sao Paulo-based credit rater Serasa Experian. Standard & Poor’s, Fitch Ratings and Moody’s Investors Service have handed out 133 downgrades to Brazilian non-financial companies so far this year, an average of more than three each business day, according to data compiled by Bloomberg.

The prolonged recession has made it tougher for the government to shore up its finances. Fiscal consolidation plans were met with resistance from an opposition emboldened by proceedings to impeach President Dilma Rousseff, as well as from coalition lawmakers incensed by initiatives to cut spending. The nation’s nominal budget deficit as a percentage of GDP reached 10.8 percent in January, its highest on record, as gross debt as a percentage of GDP climbed to 67 percent.

Fourth-quarter data will also weigh down near-term performance due to a statistical quirk known as the carry-over effect, by which the previous quarter affects the subsequent period’s result. If 2016 GDP were to remain at the same level as recorded in the fourth quarter, it would decline 2.4 percent, according to Enestor dos Santos, principal economist at Banco Bilbao Vizcaya Argentaria SA in Madrid, said by phone.

Brazil’s economy will contract 3.45 percent this year, according to the median forecast from economists surveyed by the central bank. The Organization for Economic Cooperation and Development forecasts the Brazilian economy to contract 4 percent this year, while the International Monetary Fund sees a 3.5 percent recession. Both forecast stagnation next year, which would mean no growth until 2018 when Brazilians elect a new leader.

--With assistance from Rafael Mendes To contact the reporter on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net. To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Walter Brandimarte, Robert Jameson

By: David Biller

©2016 Bloomberg News