With economists scrambling to revise forecasts for a deeper contraction this year, Brazil is in danger of not only suffering its worst recession since the 1930s but of entering into an outright depression, analysts say.
Grim third-quarter GDP data on Tuesday showed almost every sector of the economy under pressure. This includes exports, which had been expected to come to the rescue after the country’s currency, the real, lost about 52 per cent of its value against the dollar this year.
“Imports fell in an accentuated manner in the third quarter but exports, although they are more competitive . . . did not react to the strong depreciation in the exchange rate,” says Andres Osorio, Latin America commercial director at Maersk Line, the multinational container shipping company.
The GDP figures add to growing pressure on left-leaning president Dilma Rousseff, who is facing record low approval ratings, calls to impeach her in congress and a sweeping corruption investigation into state-owned oil company Petrobras that has implicated some of the country’s most powerful politicians and businessmen. The latest to be dragged into the probe was André Esteves, the head of independent investment bank BTG Pactual, who was arrested last month.
The collapsing GDP figures will complicate Ms Rousseff’s attempts to push through a fiscal austerity programme designed to shore up public finances. The budget cuts are seen as crucial to implementing a more orderly adjustment following the end of the twin commodities and credit booms that fuelled Brazil’s economy during the first decade of the century.
“The performance of emerging markets makes this year again another year to forget,” UBS Wealth Management emerging markets chief investment officer Jorge Mariscal said. But even within the underperforming emerging markets world, Brazil was a negative "outlier".
“Brazil is one of the worst performers this year in bonds, currencies and equities,” Mr Mariscal said.
After winning elections in October last year by claiming the economy was in reasonable shape, Ms Rousseff set about preparing a budget austerity programme by hiring fiscal hawk, Joaquim Levy, as her new finance minister. But her narrow win in the election weakened her grip on Congress, which has passed some of the fiscal tightening measures but delayed many others, including tax increases needed to plug a growing budget deficit.
The slowing economy is undermining government tax revenues. Ms Rousseff’s administration is running a deficit of about 9.5 per cent of GDP. This is expected to push gross public debt above 70 per cent and could lead to further downgrades of its investment grade credit rating, analysts say. Standard & Poor’s has already cut its rating for Brazil to junk while Moody’s and Fitch have signalled it is under review.
“Whether this [the negative third-quarter GDP figure] is going to be sufficient to scare politicians enough to put together an adjustment is anyone’s guess,” said Mr Mariscal.
He said his house was expecting the economy to contract 4 per cent this year and believed a 3 per cent fall next year was also possible.
Others are also revising their forecasts this year for a deeper contraction. Goldman Sachs economist Alberto Ramos said in a report that the inability of the government to deliver a stronger fiscal adjustment meant the private sector was bearing the burden of the process, with industry and employment contracting. Government spending in the third quarter actually increased 0.3 per cent compared with the second quarter, he said.
“What started as a recession driven by the adjustment needs of an economy that accumulated large macro imbalances is now mutating into an outright economic depression,” he wrote.