A bleak outlook for Brazil

Brazil is slipping from recession into depression, analysts have warned. In the third quarter of 2015, GDP fell by a record 4.5%. It’s the third quarter in a row of falling growth, marking Brazil’s deepest contraction since records began in the 1990s. Weak harvests for coffee, sugar, cotton and oranges all hurt, but “the declines were across the board”, says Joe Leahy in the FT. Forestry, cattle, industry and services are all contracting.

The data “reads like an obituary”, says Andre Perfeito, chief economist at Gradual Investimentos in São Paulo. Unemployment hit 8.9% in September, squeezing household spending, and capital investment has fallen 12.7% in the last nine months. Brazil’s debt was downgraded to “junk” in September.

As the economy has spluttered, public spending has surged, sending gross government borrowing to 66% of GDP. That “may look piffling” compared to Greece or Japan, says The Economist, but borrowing costs in Brazil are far higher, making its national debt costlier to service at a time when slowing GDP is undermining tax revenue and the weak economy is making a fiscal austerity programme politically unpalatable.

But perhaps the biggest worry is that a widening corruption scandal, centred on bribes linked to state-backed oil group Petrobras, has paralysed Brazil’s government. Impeachment proceedings were brought against President Dilma Rousseff last week, but in a demonstration of the breadth of the scandal, opposition politicians who led the petition have also been accused of taking bribes and sheltering money in Swiss accounts. Rousseff says she received the impeachment proceedings with “outrage” and intends to fight them.

Earlier in the year, contrarians argued that Brazil’s stockmarket sell-off had created the best buying opportunity since 2008. High inflation and Brazil’s depressed currency – the real (see chart) – offered a perfect inroad into the country’s consumer stocks, fund managers argued. Some multinationals have also bought into the downturn: British American Tobacco bought out its local Brazilian subsidiary for $2.5bn in October, giving it nearly 80% of the country’s cigarette market.

But the Ibovespa index, São Paulo’s leading equity index (see chart), has continued to slide, down 22% since April. “The only hope [for the brave] is that things have been so bad this year that they can’t get much worse,” says Capital Economics.

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