Brazil Goes into Recession After Two Quarter Slide

Brazil has dropped into a recession in the first half of the year as GDP falls and investments drop sharply.

By Sarah Brown, Contributing Reporter

RIO DE JANEIRO, BRAZIL – The Brazilian GDP, the largest economy in Latin America, fell by 0.6 percent in the second quarter ending in June, worse than analysts had predicted. In the first quarter revised figures showed a fall in GDP of 0.2 percent, according to data from the IBGE (Brazilian Institute of Geography and Statistics).

Mantega, Brazil finance minister, assures that Brazil is not in a recession despite recent figures, stressing that as unemployment is not rising, the slump is just temporary, photo by Agencia Brasil

Mantega, Brazil’s finance minister, assures that Brazil is not in a recession despite recent figures, stressing that as unemployment is not rising, the slump is just temporary, photo by Agencia Brasil.

A recession is defined as two consecutive quarters of contraction, which classifies Brazil as in a technical recession. However Guido Mantega, Brazil’s finance minister, denies a recession citing the drop in car exports to Argentina as one of the reasons for the setback in Brazil’s growth.

He said the fall in Brazilian GDP was small and does not affect the country’s performance or consumption, and goes on to predict an improvement in the next semester. He added that he does not see the economic downturn as a recession as unemployment is not rising.

Others are not so optimistic. “This recession shows the exhaustion of a growth model that has been centered on internal consumption,” says Eduardo Velho, chief economist at investment firm INVX Global in São Paulo.

“It is a good picture of what the economy is suffering – a slowdown in industry, a fall in investment, rising inventories. The recovery from here will be slight,” he continued, adding that deep reforms would be required from whoever wins the next election.

The Brazilian government reportedly blamed the overall international economic crisis and the World Cup for stifling economic activity, which will come as a sting to the large amount of protesters that had opposed it. Yet analysts point to structural problems for hindering the growth of the country and affecting all the regions in the Latin area.

Investments and industrial production in Brazil are on the decline, pinpointing a lessening trust in the Brazilian economy, photo by Agencia Brasil

Investments and industrial production in Brazil are on the decline, pinpointing a lessening trust in the Brazilian economy, photo by Agencia Brasil.

Margarida Gutierrez, professor of macroeconomics at UFRJ (Federal University of Rio de Janeiro) told Globo news, “This effects greatly the region because [Brazil] is the biggest country of Latin America. All the countries that have commercial connections with Brazil will suffer the impact.”

Brazil has seen a fall in investments at 5.4 percent and a reduction of 1.5 percent in industrial production, as well as a drop of 0.5 percent in services and a 0.7 percent drop in government spending. Now Mr. Mantega admits that the prediction of the growth this year, currently at 1.8 percent, needs revision as economists believe GPD will be less than one percent this year.

“With the sharp fall in investment, the potential  GDP growth rate shows a significant and worrying slowdown in recent quarters”, said Cristiano Oliveira, economist at Banco Fibra in São Paulo. He adds, “That said, we now expect no growth in the Brazilian economy in 2014, despite moderate growth in the global economy.”

This is damaging news for the government of President Dilma Rousseff with elections just weeks away. Polls show Rousseff falling behind candidate Marina Silva who, alongside Senator Aecio Neves, has fiercely criticized Rousseff for a weak approach to inflation and economic momentum. “Today is a sad day for Brazil”, said Neves to reporters. ” The truth is this government failed [...] principally in its steering of Brazil’s economy”.

Between 2003 and 2010, under the watch of predecessor Lula da Silva, Brazil’s economic growth was at an average of four percent. This makes biting news for Rousseff, given that since her presidency the economic growth averages at less than two percent.

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