Brazil economy likely shrank in first quarter for first time since 2016: Reuters poll

May 28, 2019

By Jamie McGeever

BRASILIA (Reuters) – Brazil’s economy likely shrank in the first quarter of this year for the first time since 2016, a Reuters poll of economists showed on Tuesday, with activity hit by delayed fiscal reforms, weak investment and rising unemployment.

If confirmed, it will be the first contraction since a deep 2015-2016 recession from which the economy has failed to recover — putting the country half way toward a double-dip recession.

It will also pile the pressure on far-right President Jair Bolsonaro, the former army captain who took office on Jan. 1 and whose approval ratings have slumped as the economy sputters.

The central bank said earlier this month there is a “relevant probability” that economic output contracted in the January-March period, and the government last week cut its 2019 growth forecast, citing a disappointing first quarter.

Brazil’s gross domestic product (GDP) in the first quarter of this year probably shrank 0.2 percent on a seasonally adjusted basis from the preceding three months, according to the median estimate of a poll of 18 economists.

The range was as wide as -1.4% to +0.2%.

Compared to the first quarter of 2018, the economy is expected to have grown 0.5 percent, according to the median estimate of 20 economists, less than half the growth rate in the previous quarter.

The data will be published at 9 a.m. local time (1200 GMT) on Thursday.

Economists point to a mix of reasons for the economic torpor. Some issues are structural, such as high unemployment and expensive credit despite official interest rates at a record low. Brazil also suffered ‘shocks’ such as a hit to industrial production from a burst mining dam in January.

But the main reason is the hit to consumer, investor and business sentiment from deepening uncertainty surrounding pension reform, the government’s signature economic policy proposal to save the public purse more than 1 trillion reais ($250 billion) over the next decade and reignite growth.

The legislative process is proving more complicated and contentious than Bolsonaro and team had promised. Investors, consumers and businesses are holding back, with significant economic consequences.

“The key reason for a weaker economic recovery is the significant delay in the pension reform approval and higher risk for a larger dilution (of the proposals),” Bank of America Merrill Lynch economists wrote in a recent note explaining the aggressive downward revision in their forecasts.

“Investment has been pushed back by delays and noise around pension reform,” they added.

A survey published last week showed that more Brazilians disapprove of Bolsonaro’s government than those who approve.

The XP Investimentos/Ipespe survey carried out on May 20-21 also found that the number of Brazilians who blame Bolsonaro’s government for the current economic situation doubled to 10% from the previous poll only three weeks earlier.

Morgan Stanley’s Arthur Carvalho said the “eternal feedback loop” between politics and growth shows no sign of breaking, and so the 2019 outlook has dimmed considerably in recent weeks.

The average forecast for GDP growth this year is 1.2%, according to the central bank’s weekly survey of financial institutions. That view has fallen 13 weeks in a row.

Brazil’s economy expanded by 1.1% in both 2017 and 2018. According to Alberto Ramos at Goldman Sachs, real GDP in Brazil is still 8.1% below the December 2013 cycle peak and only 3.5% above the December 2016 cyclical trough.

(Reporting by Jamie McGeever; Editing by Chizu Nomiyama; Editing by Brad Haynes and Chizu Nomiyama)

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