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LATIN AMERICA | 31-05-2019 07:39

Brazil faces recession risk after economy shrinks in first quarter

Latin America's biggest economy on brink of recession once again, new data confirms.

Brazil's economy shrank in the first quarter of the year, official data showed Thursday, taking Latin America's biggest country to the brink of recession for the first time in two years.

Gross domestic product contracted 0.2 percent from the previous quarter, the statistics agency said, marking the first decline in the key indicator of economic activity since the end of 2016.

The figure confirms what many Brazilians already knew – two years on from a devastating 2015-2016 recession, Brazil's economy is still struggling to recover.

It is bad news for far-right President Jair Bolsonaro, who took power in January on a promise to revive the economy, and increases pressure on the central bank to cut interest rates.

Bolsonaro's signature pension overhaul, seen as key to unlocking other much-needed economic reforms and repairing the country's finances, has stalled in Congress.

"The early signs are that growth in the second quarter has been very weak, too, and there is now a real risk that the economy will slip into a technical recession," said William Jackson of London-based Capital Economics.

A technical recession is defined as two consecutive quarters of GDP decline. 

When compared to the same period a year ago, the economy grew 0.5 percent in the first quarter, which Jackson said was the slowest pace in two years.

Bleak outlook

The Central Bank has so far resisted calls to cut its main interest rate, which is already at a historic low of 6.5 percent.

But Austin Rating chief economist Alex Agostini said easing inflationary pressure in May had given the bank room to lower rates.

"It is not a question of exchanging growth for inflation, but rather avoiding a new recession," he said. 

The outlook for Brazil's economy is bleak. Market analysts have pared back their full-year growth forecasts for 13 weeks in a row and now expect the economy to grow 1.2 percent.

That would be only slightly faster than the 1.1 percent growth recorded in 2017 and 2018.

Necton chief economist Andre Perfeito is even more pessimistic, with a growth forecast of 0.9 percent, which he expects to "revise down" in the coming days.

Economy Minister Paulo Guedes warned recently that Brazil was "at the bottom of the well." The government has slashed its forecast for 2019 economic growth to 1.6 percent, from an estimate of 2.5 percent early in the year.

Guedes, who is spearheading the government's reform agenda, threatened to resign last week if the pension bill was not passed or was watered down too much.

Reforms were key to kick-starting growth, Guedes was quoted by the state news agency as saying.

"We're not going to do magic tricks, we are going to do serious reforms," he said.

Rising unemployment

Adding to the government's woes is rising unemployment, with more than 13 million people out of work. The latest jobless data is due on Friday. 

One of the factors holding back Brazil's recovery is its huge public debt, which the International Monetary Fund estimates to be 88 percent of GDP – one of the largest among its peers.

The commodities-driven economy was also hit hard by the deadly collapse of a tailings dam owned by Vale in January that forced the mining giant to suspend operations at several mines, reducing its output of iron ore and hurting Brazil's exports.

Brazil is the latest Latin American country to flirt with recession. Mexico's economy shrank 0.2 percent in the first quarter of the year while Argentina is in the grips of a worsening economic crisis.

But Marcos Casarin of Oxford Economics played down the chances of a "double-dip recession," predicting 0.6 percent growth in the current quarter.

"Collapsing demand in Argentina accounted for nearly half of the decline in exports, with negative implications for Brazil’s manufacturing," he said.

In the second quarter, though, Argentina's demand should be "gradually recovering."

The shrinkage in the Brazilian economy comes as Bolsonaro's government faces growing opposition only five months into its term.

Bolsonaro's popularity has plunged as infighting between government factions and conflict between his administration and key leaders of Congress, where his ultraconservative Social Liberal Party lacks a majority, hinder progress.

More protests over recent education spending freezes are taking place Thursday, weeks after tens of thousands of demonstrators took to the streets across the country.

- AFP

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