Brazil re­ces­sion: GDP plunges 1.9pc in 2Q

The Pak Banker - - 6BUSINESS -

The bot­tom seems to have fallen out of Brazil's econ­omy, with the gov­ern­ment re­port­ing that the gross do­mes­tic prod­uct plunged 1.9 per­cent in the sec­ond quar­ter alone, once again throw­ing the na­tion into a tech­ni­cal re­ces­sion.

It's more bad news for Pres­i­dent Dilma Rouss­eff, who is fight­ing for her po­lit­i­cal life. Two-thirds of Brazil­ians polled say they want to see her im­peached be­cause of a mas­sive cor­rup­tion scan­dal and what is widely per­ceived as mis­han­dling of the econ­omy. The drop was slightly larger than con­sen­sus fore­casts of pri­vate econ­o­mists pub­lished by the Cen­tral Bank, and prompted many to take an even gloomier view or prospects for the globe's sev­enth-largest econ­omy. "We are nudg­ing down our forecast and now think the econ­omy will con­tract by 2.5 per­cent this year," the Lon­don-based firm Cap­i­tal Eco­nom­ics wrote in a Fri­day re­search re­port, not­ing that pre­vi­ously it forecast a 1 per­cent drop.

Like most Latin Amer­i­can na­tions, Brazil has been hurt by the plunge in com­mod­ity prices and the slow­down in China, which has been a big buyer of Brazil's soy, iron ore and other com­modi­ties. How­ever, Brazil's econ­omy de­pends far less on trade than most na­tions in the re­gion, with ex­ports and im­ports mak­ing up just 27 per­cent of GDP ac­cord­ing to the World Bank.

Brazil boomed for sev­eral years on the back of a mid­dle class that ex­panded by some 40 mil­lion peo­ple since 2003. Sud­denly flush with easy credit, they went on a sus­tained spend­ing spree, upon which Brazil's gov­ern­ment built its eco­nomic model.

That spree started to sput­ter about three years ago and is now of­fi­cially dead. Many Brazil­ians are in debt over their heads and are cut­ting spend­ing se­verely. House­hold spend­ing re­ported Fri­day fell 2.1 per­cent as com­pared to the pre­vi­ous quar­ter. Ris­ing in­fla­tion, un­em­ploy­ment and tight­en­ing per­sonal credit have added to sour­ing con­sumer con­fi­dence.

Rouss­eff, speak­ing in north­east­ern Brazil as she in­au­gu­rated a low­in­come hous­ing pro­ject, tried to rally the crowd of mostly im­pov­er­ished Brazil­ians. "I know that we're pass­ing through dif­fi­cul­ties. Many of you are scared, you think that we're in an un­cer­tain sit­u­a­tion, you feel that in­fla­tion is still too high and you fear los­ing your jobs," she said. "I want to say that my gov­ern­ment thinks of two things: In how to in­crease em­ploy­ment, to guar­an­tee that the coun­try re­turns to growth, and in how to re­duce in­fla­tion, be­cause we know that in­fla­tion erodes the in­come of the worker."

In­fla­tion for the 12 months end­ing in July stood at 9.56 per­cent, the gov­ern­ment re­ported ear­lier this month. That's far above the gov­ern­ment's ceil­ing tar­get of 6.5 per­cent.

On GDP, the gov­ern­ment's IBGE bureau said the big­gest sec­ond-quar­ter drop took place in the in­dus­trial sec­tor, where con­struc­tion out­put fell 8.4 per­cent.

That's largely be­cause the na­tion's big­gest con­struc­tion and en­gi­neer­ing firms have been im­pli­cated in a mas­sive kick­back scan­dal at state-run oil com­pany Petro­bras. Fed­eral pros­e­cu­tors al­lege that the na­tion's big­gest firms paid at least $2 bil­lion in bribes over about a decade to po­lit­i­cally ap­pointed Petro­bras ex­ec­u­tives in ex­change for grossly in­flated build­ing con­tracts.

Since then, most of the firms in the con­struc­tion sec­tor have been shut out of credit mar­kets and are cash-starved and un­able to com­plete projects or be­gin new ones. Mean­while, gov­ern­ment and pri­vate in­vest­ments dropped 8.1 per­cent, adding to the cold eco­nomic cli­mate.

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