Brazil's Economy Contracts for Eighth Consecutive Quarter

03/07/2017 - 11h20

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JOE LEAHY

FROM SAO PAULO

Brazil's economy shrank 3.6 per cent last year as high inflation, a runaway budget deficit and political turmoil drove the country to its worst recession on record.

The contraction, which was felt across almost all economic sectors from industry to services, was slightly worse than economists' estimates and only marginally better than 2015, when gross domestic product contracted 3.8 per cent.

GDP in the final three months of the year was down 0.9 per cent, compared with the revised 0.7 per cent drop recorded in the previous quarter and worse than the 0.5 per cent contraction forecast by a Bloomberg survey of economists.

"This was the eighth negative consecutive [quarterly] result," the national statistics agency confirmed.

The figures underline the challenge facing the government of Michel Temer, the pro-business president who took power last year following the decision to impeach his predecessor Dilma Rousseff.

Under Ms Rousseff, Brazil's economy collapsed following the end of the commodity supercycle in 2011 into a toxic mix of recession, soaring inflation, high interest rates and exploding budget deficits.

Since taking power, Mr Temer has stabilised financial markets by passing a reform limiting real increases in budget spending to zero and pushing to change the country's pension system, which many regard as financially unsustainable.

The central bank, meanwhile, has brought inflation back into the official target range of 4.5 per cent plus or minus 1.5 percentage points.

The bank has also begun to slash interest rates. Brazil's real rates, which allow for inflation, are considered among the highest for any large economy in the world, at about 7 per cent per annum.

Several economists expressed optimism that the recession was ending. Capital Economics said it expected the fourth quarter of last year to be the last in which the economy contracted.

"Indeed, not only do we expect the economy to return to growth this year, but our forecasts for 2017 and 2018 are above consensus," it said, predicting 1 per cent growth this year and 2.5 per cent next year.

A piece of good news from Tuesday's data was that the farming sector grew 1 per cent in the fourth quarter. But more negative was a continuing decline in investment.

Mr Temer's government is trying to engineer an economic recovery in time to restore voter confidence ahead of elections due next year.

While Ms Rousseff was impeached for manipulating the budget, Mr Temer and his allies in Congress are under scrutiny over allegations that they accepted funds from corrupt construction executives for election campaigns.

The electoral court, which is considering the allegations, has the power to annul Mr Temer's mandate if it finds him guilty, although he could avoid standing down before the next election by challenging the process in higher courts.

He has denied wrongdoing.

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