Brazil slips into recession as post-pandemic recovery stalls – News Couple

Brazil slips into recession as post-pandemic recovery stalls

(Bloomberg) — The Brazilian economy has entered a recession as harsh weather, high interest rates and inflation halt its recovery from the pandemic, dealing a blow to President Jair Bolsonaro as he prepares for his re-election campaign.

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Gross domestic product declined 0.1% in the July-September period after posting a revised 0.4% decline in the second quarter. The national statistics agency said Thursday that the economy grew by 4% a year ago.

The economic downturn presents growing challenges for the largest economy in Latin America. Unemployment exceeds 12%, annual inflation is at a five-year high, and the central bank has unleashed the world’s most aggressive monetary tightening campaign this year. While most countries are enjoying strong growth in the wake of the coronavirus, Brazil is losing momentum despite the lifting of epidemic-related restrictions and the expansion of the vaccination campaign.

Read more: Brazil’s central bank warns of high prices too quickly

The data prompted traders to offload bets that the central bank might get bolder to rein in inflation. Swap rates on contracts due in January 2023, which indicate expectations for the Selic benchmark at the end of 2022, were down 22 basis points to 11.6% by mid-morning.

“There is a sense of paralysis,” said Sergio Vall, chief economist at MB Associados, a consultancy, adding that policy makers are likely to be more cautious when raising rates in the coming months. “The economy hit a high in the second quarter and stopped there, and some sectors, such as agriculture, suffered a lot.”

Brazil’s massive agriculture sector fell 8% from a quarter amid drought and frost, while the industry was flat. On the other hand, consumption of services and household grew by 1.1% and 0.9%, respectively, according to the statistics agency.

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“The second consecutive contraction in the third quarter put the Brazilian economy into a technical recession and left growth slightly below its pre-pandemic level. Challenging external conditions, sharp monetary tightening and rising financial uncertainties suggest there is limited scope for a meaningful recovery in the coming quarters. We expect it to grow The economy is up 4.5% this year and 0.6% weak growth in 2022.”

– Adriana Dupita, Latin American Economist

Click here to read the full report.

Brazil’s challenges

Many of Brazil’s problems are beyond its control: disruptions in the global supply chain, climate change that has damaged farmland and soaring commodity prices are helping to increase inflation that will translate into higher borrowing costs.

Traders are betting on a rate hike of at least 150 basis points at next week’s policy meeting, which will lift Selic to 9.25%. Gross domestic product data may prompt the central bank to soften the hawkish stance it has taken in recent months, according to William Jackson, an economist at Capital Economics.

“With tightening financial conditions, deteriorating terms of trade, and the threat from the new Omicron variable, risks to our GDP growth forecast for next year at 1.3% are strongly skewed to the downside,” Jackson wrote in a research note on Thursday.

Part of the economic pain is self-inflicted. Investors are increasingly concerned about public finances as the government presses for changes to a key austerity law to allow Bolsonaro to increase social spending ahead of the 2022 vote. These concerns have caused the rial to lose about 8% of its value against the dollar this year despite rising interest rates.

Analysts surveyed by the central bank have lowered their GDP forecasts for the past two months as questions about Brazil’s fiscal trajectory grow. They now expect economic growth to slow to less than 0.6% next year from 4.8% in 2021.

(Updates begin with market reaction and analysis in the fourth paragraph.)

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