SAO PAULO, (Reuters) – Brazil’s economy shrank 1.9 percent in the second quarter, sinking into a recession that has hammered President Dilma Rousseff’s popularity as she struggles to save the country’s investment-grade credit rating amid a vast corruption scandal.
The quarterly contraction, reported by government statistics agency IBGE yesterday, was bigger than the median forecast of a 1.7 percent drop in a Reuters poll and confirms the worst slowdown for Brazil in nearly three decades.
A commodities-fueled economic boom has fizzled since Rousseff took office in 2011, and her stimulus efforts drove up public and private debt without spurring growth.
This year she reversed course, trying to cut government spending and subsidies as the central bank battles inflation. The austerity program has torn apart her governing coalition, but failed to lift business and consumer confidence from record lows.
Investment plunged 8.1 percent in the second quarter, its eighth straight decline. Household consumption, an economic engine during the boom years, fell 2.1 percent, the worst drop since 2001, due to rising unemployment, tighter credit and the highest inflation in over a decade.
“The drop in consumption shows the crisis of confidence the economy is facing,” said Newton Rosa, chief economist with SulAmerica Investimentos. “This is going to be an intense and prolonged recession … We can’t hope for a recovery until at least the middle of next year.”
The economy contracted 2.6 percent from the second quarter last year. Brazil’s sharp downturn is contributing to fears that fragile emerging markets will cripple global growth this year. A slowdown in China is already threatening commodity exporters across Africa and Latin America.
In Brazil, once flush with export revenues because of ravenous Chinese demand for iron ore and soybeans, industrial surveys, consumer defaults and online retail sales all show a recession that deepened in recent months.
Financial markets had expected poor growth data after months of grim indicators. Brazil’s currency, the real, dropped 1 percent against the dollar and the Bovespa stock index was 0.1 percent lower. The real has depreciated 25 percent against the dollar this year and the Bovespa has lost 5 percent.
The economic slump has accentuated a mounting political crisis.
Rousseff’s approval rating fell to single digits in recent polls, hit by the recession and mounting evidence of a kickback scheme that funneled billions of dollars away from state-run firms.
Brazil’s biggest engineering groups have had executives jailed and contracts frozen in the scandal, paralyzing major public works and investments in the energy sector.
Political fallout from the scandal has also turned key congressional allies against Rousseff, weakening her austerity efforts and emboldening opposition cries for her impeachment.
Though there is little legal basis so far to justify impeaching Rousseff, who is not under investigation in the corruption probe, polls show two in three Brazilians support her ouster.
Government spending rose 0.7 percent in the second quarter. Fiscal data released separately on Friday showed a bigger-than-expected budget deficit in July, threatening the government’s already lowered fiscal goal for the year.
