(Bloomberg) -- Brazil’s economy fell into a shallow recession this year dragged down by drought, a high interest rate and inflation, dealing a blow to President Jair Bolsonaro just as he prepares for his re-election campaign.
Gross domestic product fell 0.1% in the July-September period after posting a revised decline of 0.4% in the second quarter. From a year ago, the economy expanded 4%, the national statistics agency said on Thursday.
The downturn shows mounting challenges for Latin America’s largest economy. Unemployment stands above 12%, annual inflation is running 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 aftermath of the pandemic, activity is losing momentum in Brazil despite the lifting of coronavirus restrictions and a vastly expanded vaccination drive.
Read more: Brazil’s Central Bank Cautions Against Hiking Rates Too Fast
Brazil’s massive agriculture sector was down 8% on the quarter amid a drought, while industry was flat. On the other hand, services and family consumption grew 1.1% and 0.9%, respectively, the statistics agency said.
Swap rates on the contract due in January 2023, which indicate investor expectations for the Selic at end-2022, fell 11 basis points to 11.71% in morning trading following the data release. The real gained 0.2% to 5.6686 per dollar.
What Bloomberg Economics Says
“A second consecutive contraction in the third quarter put the Brazilian economy in a technical recession and left growth slightly below its pre-pandemic level. Challenging external conditions, sharp monetary tightening and rising fiscal uncertainties suggest limited room for a meaningful rebound in the quarters ahead. We expect the economy to grow 4.5% this year and a lackluster 0.6% in 2022.”
-- Adriana Dupita, Latin America economist
Click here to read the full report.
Brazil’s Challenges
Many of Brazil’s problems hurting the economy are global in nature: disruptions in the world supply chain, drought that has decimated farmland and higher commodity prices are helping to fuel inflation which will translate into even higher borrowing costs. Traders are betting on an interest rate hike of at least 150 basis points at next week’s policy meeting, which would take the Selic to 9.25%.
Yet part of the pain is self-inflicted. Investors are increasingly worried about public finances as the government pushes for changes in a key austerity law to allow Bolsonaro to boost social spending ahead of the 2022 election. Such concerns have caused the real to lose about 8% of its value against the dollar this year despite rising interest rates.
Analysts surveyed by the central bank have slashed their GDP forecasts over 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 with market reaction and sector growth details beginning in fourth paragraph)
©2021 Bloomberg L.P.
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