GKFX - Brazil’s Carnival is over - GDP plummets a record 4.5% y/y in Q3.
Brazil’s gross domestic product fell by a record 4.5 per cent year-on-year in the third quarter. This has confirmed fears that Latin America’s largest country is on track for its worst recession since the Great Depression.
The quarterly contraction, reported by government statistics agency IBGE yesterday, was bigger than expected, coming in at 1.7 percent.
The cumulative drop of 3.2 percent for the year so far is the worst since 1996, according to the Brazilian Institute of Geography and Statistics, when Brazil starting measuring Gross Domestic Product (GDP) through its current system.
Lower commodity prices, fiscal contraction, and the fading of a consumer credit boom have battered what was once one of the world’s fastest-growing economies.
Brazil has also taken a hit from the sweeping “Car Wash” investigation into corruption at Petrobras, the state-owned oil company. This has paralysed congress and the corporate sector.
The scandal has also begun to spread to the financial services industry too. Last week saw the arrest of billionaire banker Andre Esteves, chief executive of investment bank BTG Pactual.
Brazil’s statistics agency said on Tuesday that GDP in the three months to September fell 1.7 per cent against a revised second quarter. This was worse than analysts’ expectations. The year-on-year fall was the biggest since the start of the historical data series in 1996.
The slowdown is generating a perfect storm of negative economic data.
Unemployment rose to 7.9 per cent in September, up from 4.7 per cent in October last year. Inflation is running at more than 10 per cent for the first time since 2002. And Brazil’s government budget deficit is now at 9.5 per cent of gross domestic product.
The poor GDP figures pile even more pressure on Brazil’s left-leaning president, Dilma Rousseff, who is trying to implement fiscal austerity measures while battling low approval ratings and calls for her impeachment in Congress. Rousseff is under heavy pressure to comply with Brazil’s budget law after the Federal Accounts Court ruled that she doctored the country's public finances in 2014. Her political opponents are using that as a basis for impeachment
Brazil’s commodity-fuelled boom has also crashed since Rousseff took office in 2011, forcing her to abandon stimulus efforts this year as she seeks to rescue the federal budget.
The president’s unpopular austerity package, led by market favourite Joaquim Levy, has foundered in Congress however, and the recession is shrinking tax revenue faster than she can trim spending, eroding her credibility and leading Standard & Poor’s to cut Brazil's credit rating to junk.
Capital Economics said in a note about the situation that: and here we quote: “It seems likely that GDP will fall by something like 3.5 per cent this year rather than the 2.5 per cent we had expected” and here we end the quote.
Brazil’s problems are largely of its own making. But it is certainly not the only big emerging economy to suffer from the end of the commodities super-cycle and slowing growth in China.
Russia is experiencing its first recession since 2009 amid low oil prices and western sanctions imposed over the Kremlin’s role in the Ukraine crisis.
Worryingly for Brazil’s policymakers, the declines were across the board. Agriculture fell 2.4 per cent compared with the previous three months while industry fell 1.3 per cent and services dropped 1 per cent.
Household consumption fell 1.5 per cent and gross fixed capital formation, or investment, was down 4 per cent during the three months.
The figures were so dismal across the board they have already led economists to cut their forecasts for 2016. Investment fell 15 percent from a year earlier, declining for the ninth consecutive quarter, as political disarray and a sweeping graft investigation battered business confidence.
The fall in agriculture was due to weak harvests for several commodities that normally perform strongly during the three months to the end of September. These included coffee, sugar cane, oranges, cotton and wheat. Forestry and cattle husbandry also performed weakly.
The trade balance made a positive contribution to growth. But this was mostly due to a crash in imports of minus 20 per cent quarter-on-quarter rather than a large increase in exports. Exports only grew 1.1 per cent quarter-on-quarter.
There are few signs that things will get much better in the final months of this year. The cloud of political uncertainty in Brazil has sapped business and consumer confidence, which remain stuck near record lows. The economy has shed more than 1.4 million formal jobs in the past year, causing the most unemployment since the 2009 financial crisis.
Capital Economics concluded their note by saying: and here we quote again: “The only hope for the brave is that things have been so bad this year that they can’t get much worse in 2016. Indeed, there are signs — if you squint — that the collapse in investment is starting to ease.” and here we end the quote.
However the Statistics seem to be saying that employers are discouraged from investing in this year of intense political turmoil and disorder in public finances.
What price elections ? its Greece all over again but on a vastly bigger scale.
This has been Alex Heath for GKFX
Goodbye and thanks for watching.