The Economy

Brazil’s 0.2% GDP Drop Fans Recession Fears

"There is a very real risk of contraction, which would take the country into a technical recession," an economist warns.
Matthew HellerMay 31, 2019
Brazil’s 0.2% GDP Drop Fans Recession Fears

Brazil’s economy contracted in the first quarter of 2019, fueling fears that the country is heading toward another recession.

According to official government data released on Thursday, Brazil’s gross domestic product declined by 0.2% from the previous quarter. It was the first drop in GDP since the fourth quarter of 2016 when Latin America’s largest country was in the midst of a severe recession.

The GDP report was in line with economists’ expectations but other recent indicators, including industrial production and consumer confidence, also suggest an ailing economy.

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Since the beginning of the year, economists have more than halved their expectations of economic growth for 2019 to a rate not very different from that seen in the past two years. After the 2015-2016 recession saw the economy contract by almost 7%, the recovery has been sluggish, with growth at a meagre pace of 1.1% a year in 2017 and 2018.

“There is a very real risk of contraction, which would take the country into a technical recession,” Isabela Guarino, chief economist at XP Asset Management in Sao Paulo, told the Financial Times. “It’s not our base case, but it’s a rising risk.”

Far-right President Jair Bolsonaro took power in January on a promise to boost growth but his signature pension overhaul has stalled in Congress. Gross public debt is forecast to hit 90% of GDP this year, according to the International Monetary Fund.

“The great drama of Brazil is the accelerated growth of spending, which is underpinned by an unsustainable pensions system,” Marcos Lisboa, an economist with the Insper business school, told the Financial Times.

“The longer it takes to solve that problem, the longer it will take for the economy to recover, the more fragile the economy becomes and the more sensitive it is to negative shocks,” he added.

Economic growth for the year is now forecast at 1.2%, down from an estimated 2.6% in January, according to Brazil’s central bank. The Banco Central do Brasil has so far resisted calls to cut its main interest rate, which is already at a historic low of 6.5%.