Brazil’s economy shrinks for the second year in a row

Brazil’s economy contracted 0.9 per cent in the fourth quarter from the previous three months after a 0.7 per cent drop in the third quarter, according to the IBGE, Brazil’s national statistics institute. That was the biggest decline in the year and the eight consecutive quarter of negative growth.

GDP shrank 3.6 per cent in 2016 as a whole, following a 3.8 per cent contraction in 2015, the worst recession in more than a century.

Four of six sectors of the economy contracted during the final three months of 2016. Investment dropped 1.6 per cent from the previous quarter. Overall investment stood at just 16.4 per cent of GDP in 2016, down from 18.1 per cent of GDP in 2015. Services fell 0.8 per cent. Family consumption declined 0.6 per cent as many families are struggling to make ends meet as unemployment is at its highest level on record. Industries dropped 0.7 per cent. Agriculture rose 1 per cent. Government consumption was up 0.1 per cent.

As one of the world’s biggest emerging-market economies, Brazil attracted more than 70 billion dollars in foreign direct investment in 2016.

Michel Temer became president in August after his predecessor, the leftist president Dilma Rousseff, was impeached for illegally manipulating public accounts. His centrist, pro-business government has embarked on a series of economic reforms in an attempt to reduce the budget deficit, restore public and investor confidence and drag Brazil out of its deep recession. Last year, Congress passed a constitutional amendment, which freezes government spending in inflation-adjusted terms for up to 20 years. The Temer administration is hoping to secure congressional approval for pension and labour reform bills this year, but that may prove difficult to achieve as support in Congress for the government’s reform agenda is wavering, including in Mr Temer’s Brazilian Democratic Movement Party, or PMDB.

The average retirement age in Brazil is about 54 years. Brazil’s pension system are pay-as-you-go, meaning that the active labour force pays for pensions of the currently retired. Mr Temer wants to establish a minimum retirement age of 65 for both men and women. If the system is unchanged, Brazil will have to spend about a fifth of its GDP on pensions by 2060.

The central bank began its easing cycle in October as inflation fell from its highs under Rousseff’s government. Annual inflation slowed to 5.35 per cent in January, the lowest rate since 2012. On February 22, the central bank’s monetary policy committee lowered the benchmark Selic interest rate by 75 basis points to 12.25 per cent, the second such cut in a row. Interest rates, though, remain among the highest in the world for a major economy.

Inflation, the perennial scourge of Brazil’s economy, is expected at the central bank’s 4.5 per cent target and the Selic rate below 10 per cent by year-end.

The International Monetary Fund projects that Latin America’s biggest economy will grow by just 0.2 per cent this year and 1.5 per cent in 2018. The expected recovery, however, could be derailed by corruption investigations. Mr Temer and members of his ruling coalition allegedly accepted funds for election campaigns from disgraced construction companies involved in the multi-billion dollars corruption scandal at Petrobras, the state-controlled oil company. Plea bargain testimonies from Odebrecht executives are hitting politicians across political spectrum, raising concerns about Mr Temer’s survival as president.

Photo: Agência Brasil Fotografias

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