Brazil’s plunging GDP crushes hopes of Temer turnround

Posted on November 30, 2016

Brazil’s economy recorded its seventh straight quarterly contraction between July and September, disappointing hopes the new government of president Michel Temer could engineer a quick turnround in the fortunes of Latin America’s biggest economy. 

The news on the economy, with gross domestic product contracting at an annual rate of 2.9 per cent during the third quarter, came after protesters fought pitched battles in the streets of Brasília overnight against a budgetary reform being voted on in the senate. 

“The ongoing economic recession/depression has now lasted an extraordinarily long period of time,” wrote Alberto Ramos, a Goldman Sachs economist, in a note. “By the third quarter of 2016, real GDP was at the same level of the third quarter of 2010.” 

The pro-business Temer government took power in August after former president Dilma Rousseff of the leftist Workers’ party was impeached for manipulating the budget. 

Markets rallied on optimism that Mr Temer would be able to rescue Latin America’s largest economy from a toxic mix of recession, inflation, a deepening budget deficit and rising unemployment left by Ms Rousseff’s administration. 

Mr Temer responded by pushing Congress to approve a reform that would freeze budget spending in real terms at 2017 levels and promising an overhaul of Brazil’s overgenerous pension system and its labour laws. 

But the recession in Latin America’s biggest economy has proved to be deeper and more difficult to end than markets had expected during the impeachment process.

The government’s statistics bureau said on Wednesday that the economy contracted 0.8 per cent in the third quarter compared with the previous three months. 

The biggest quarter-on-quarter contraction this year, the fall was driven by a 3.1 per cent quarter-on-quarter decline in investment.

The contraction in investment reversed a small rise in the second quarter and raised questions about the strength of any long-term recovery in the economy. 

Household consumption and services declined and exports fell 2.8 per cent during the quarter compared with the previous three months, while imports declined 3.1 per cent as Brazil’s indebted consumers avoided shopping. 

“Cumulative GDP in the year to the end of September showed a decline of 4 per cent in relation to the same period of 2015. It was the biggest fall in cumulative GDP for this period between January and September since the beginning of the series in 1996,” the statistics bureau said. 

Economists are predicting a small recovery in 2017 of just under 1 per cent, according to a survey of analysts by the central bank. 

On the positive side for the government, Mr Temer scored a victory overnight when the constitutional amendment to freeze budget spending passed the first of two rounds of voting in the senate. 

But of concern for the government were clashes overnight between police and leftist groups in Brasília opposed to the amendment, which until now had gone through Congress without serious opposition on the streets, analysts said. 

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