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Economic Insight Brazil’s GDP shrinks, economy flirts with another recession

Brazil’s economy shrank in the first quarter for the first time since 2016, data showed on Thursday, pushing Latin America’s largest economy closer to a double-dip recession.

The contraction piled pressure on President Jair Bolsonaro, who was swept into office in January after making market-friendly pledges to boost growth and lift the gloom hanging over the economy since a brutal 2015-16 recession.

Brazil’s gross domestic product (GDP) shrank 0.2 per cent from the prior quarter, statistics agency IBGE said, in line with the median estimate in a Reuters poll. The economy grew 0.5 per cent from a year earlier, in line with economists’ forecasts.

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Although the figures were in line with forecasts, the economy remains weak. Leading indicators from April and May, such as consumer confidence, bank lending and export data, also suggest the economy is still in a funk.

“The signs so far in the second quarter are that the economy is not recovering,” said Isabela Guarino, chief economist at XP Asset Management in Sao Paulo, who forecast growth of just 0.1 per cent in the April-June quarter.

“But there is a very real risk of contraction, which would take the country into a technical recession. It’s not our base case, but it’s a rising risk,” she said.

Brazil has been in recession five times in the past 20 years. The last time was 2015-16, one of the worst recessions in the country’s history. The recovery since then is the weakest on record, according to Alberto Ramos at Goldman Sachs.

Brazilian markets showed little reaction to the data. The Bovespa stock market was up 0.4 per cent in early trade, the real was steady at 3.9770 per dollar and the most heavily traded interest rate futures contracts over the next year were flat to slightly higher.

The currency has risen and rate expectations have fallen sharply in recent days.

The central bank’s weekly survey of around 100 financial institutions showed the average estimate for 2019 GDP growth has fallen for 13 consecutive weeks and now stands at 1.2 per cent, down from 2.5 per cent at the start of the year.

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Fixed investment fell 1.7 per cent in the first quarter, industrial output fell 0.7 per cent and agricultural output fell 0.5 per cent, IBGE figures showed. A 1.9 per cent slump in exports and 0.5 per cent rise in imports meant net trade was a drag on growth.

On the other hand, services activity grew 0.2 per cent, household spending rose 0.3 per cent and government expenditure increased 0.4 per cent.

“The economy is stagnating, but the bias is downward. Growth will be near zero this year,” said Jose Francisco Goncalves, chief economist at Banco Fator in Sao Paulo.

Brazil’s GDP was worth 1.714 trillion reais ($431-billion) in the first quarter, IBGE said.

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