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Brazil flirts with a double-dip recession

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Brazil’s economy shrank in the first quarter for the first time since 2016, data showed on Thursday, pushing Latin America’s largest economy closer to a double-dip recession.

Optimism that President Jair Bolsonaro would quickly unlock Brazil’s growth potential faces the reality of lengthy negotiations between Congress and his inexperienced administration. The former military officer was swept into office in January after making market-friendly pledges to boost growth and after the brutal 2015-16 recession.

Delay in passing reforms is keeping much-needed investment at bay and, meanwhile, the economy has been buffeted by blows to production. Not even borrowing costs at an all-time low are encouraging a pick-up in consumption.

“The data is bad without a doubt, demonstrating the economy’s weakness at the start of the year,” said Luciano Rostagno, chief strategist at Banco Mizuho do Brasil. “But we have to consider some shocks that prompted a negative reading.”

First-quarter results were marred by a bad crop that caused agriculture to decline, the deadly collapse of a Vale mining dam in Brumadinho that torpedoed iron ore shipments and a prolonged recession in neighbouring Argentina sapping demand for Brazilian car exports.

On January 25, a dam at Vale’s Córrego do Feijão iron ore mine ruptured and collapsed, unleashing a tidal wave of sludge that devoured everything in a five-kilometre path killing 231 people. Vale is a key competitor in global markets for iron ore with BHP and Rio Tinto.

Gross domestic product (GDP) shrank 0.2 per cent from the prior quarter, statistics agency IBGE said. The economy grew 0.5 per cent from a year earlier, in line with economists’ forecasts.

Although the figures were in line with forecasts, the economy remains weak. Leading indicators from April and May, such as consumer confidence, bank lending and export data, also suggest the economy is still in a funk.

“The signs so far in the second quarter are that the economy is not recovering,” said Isabela Guarino, chief economist at XP Asset Management in Sao Paulo, who forecast growth of just 0.1 per cent in the April-June quarter.

“But there is a very real risk of contraction, which would take the country into a technical recession. It’s not our base case, but it’s a rising risk,” she said.

Brazil has been in recession five times in the past 20 years. The last time was 2015-16, one of the worst recessions in the country’s history. The recovery since then is the weakest on record, according to Alberto Ramos at Goldman Sachs.

Brazilian markets showed little reaction to the data. The Bovespa stock market was up 0.4 per cent in early trade, the real was steady at 3.9770 per dollar and the most heavily traded interest rate futures contracts over the next year were flat to slightly higher.

The currency has risen and rate expectations have fallen sharply in recent days.

The central bank’s weekly survey of about 100 financial institutions showed the average estimate for 2019 GDP growth has fallen for 13 consecutive weeks and now stands at 1.2 per cent, down from 2.5 per cent at the start of the year.

Fixed investment fell 1.7 per cent in the first quarter, industrial output fell 0.7 per cent and agricultural output fell 0.5 per cent, IBGE figures showed. A 1.9 per cent slump in exports and 0.5 per cent rise in imports meant net trade was a drag on growth.

On the other hand, services activity grew 0.2 per cent, household spending rose 0.3 per cent and government expenditure increased 0.4 per cent.

“The economy is stagnating, but the bias is downward. Growth will be near zero this year,” said Jose Francisco Goncalves, chief economist at Banco Fator in Sao Paulo.

Brazil’s GDP was worth 1.714 trillion reais ($625 billion) in the first quarter, IBGE said.

Source: Bloomberg

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