Analysis: Brazil’s recession to ‘deepen’ in 2016

Brazil is facing a perfect storm of bad economic and political developments which threaten to make 2016 one of the hardest periods the country has faced in decades. 

On Friday, the Banco Central do Brasil (BACEN) released its economic activity index – a measure of productivity in the farming, industry and services sectors, which showed that there had been a 0.63 decline in October from the previous month.

Year on year, activity has falled by 6.38 per cent.

The sharper-than-expected decline was only the latest volley of bad economic data to add to the government’s fiscal woes.

While President Dilma Roosseff remains steadfast against calls for her impeachment on suspected corruption, the biggest challenge to her political career remains Brazil’s economic health.

This week was particularly bad for her cabinet as the economy appeared to continue its downward spiral.

Brazil’s economy is in a “deeper recession than previously anticipated, continued adverse fiscal developments and the increased political uncertainty,” the global ratings agency Fitch said as it downgraded the country’s debt to junk status or BB+ with a negative outlook.

(In September, the Standard & Poor’s rating agency cut Brazil’s rating to junk.)

The rating downgrades chip at Roussef’s – and Brazil’s – credibility and marketability abroad.

Her trip to the US in July was largely to encourage international businesses to “take advantage of the business and investment opportunities that are emerging in Brazil, especially in infrastructure” she earlier said.

Oil and the Fed

Brazil is the world’s 12th largest oil producer, an aspect that has helped the country’s $2.2 trillion economy become the largest in Latin America.

When oil prices were at least around $110 a barrel, Brazil – and other emerging oil-exporting economies – was the darling of foreign investors.

In 2013, Brazil’s GDP was expected to reach 2.13 per cent; inflation was around 5.8 per cent; interest rates were around 9.25 per cent and the trade surplus was at $6 billion.

But then two things happened: First, the US Federal Reserve terminated its six-year bond-buying stimulus program in 2014.

Extra cash which had been available because of this program and which had been injected into foreign markets suddenly reveresed direction and headed back to the US.

Simultaneously, oil prices fell to around $80 a barrel.

By 2014, the picture was drastically reversed: Industrial output, including in the automotive sector, plummeted; inflation rose to 6.3 per cent; interest rates jumped to nearly 11 per cent and economic growth was under 1 per cent.

2015 was an even worse year. Inflation was practically out of control hitting 8.47 per cent in April. Brazil’s Central Bank has struggled for years to bring it down to a healthy level of 4.5 per cent.

Unemployment increased from 4.7 per cent in July 2014 to 6.7 per cent in April 2015. By October, the jobless rate stood at 7.9 per cent.

(It unexpectedly fell to 7.5 per cent in November)

The benchmark SELIC interest rate was raised to over 13 per cent in April 2015 and by July had risen again to 14.25 per cent, the highest in nine years.

BACEN has kept the rate steady since then.

Still, oil and the Fed

But in December, the economic vulnerabilities of oil-exporting emerging markets such as Brazil became acute when oil prices fell below $36 a barrel.

The Fed’s decision on Wednesday to raise interest rates for the first time in a decade by a measured 0.25 per cent means that there is likely to be more capital outflow from emerging markets like Brazil.

Given the double whammy of low oil prices and incresed capital outflow, Brazil’s recession is expected to become worse and, many analysts say, go well into late 2016 – or beyond.

Government statistics agency IBGE said in early December that the Brazilian economy contracted 1.7 per cent in the third quarter of the year over the previous quarter.

In the first nine months, the economy contracted 3.2 per cent compared with the same period in 2014.

Year on year, gross domestic product (GDP) fell 4.5 in the third quarter, said the.

Economists say that growth in 2015 will have contracted by 3.3 per cent. They predict a 3.5 per cent contraction in 2016.

Source: The BRICS Post

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