The second quarter of Brazil saw the country sinking into a recession by 1.9%, tarnishing the popularity of President Dilma Rousseff. She is finding it hard to save Brazil’s credit rating of investment-grade. Several corruption scandals have further fueled the adverse situation facing her.
The government statistics agency IBGE reported a quarterly contraction that was bigger than Reuters poll’s median forecast of a 1.7 % decrease. This is enough evidence that Brazil is facing the worst slowdown in about three decades.
Why is Brazil experiencing economic downfall now?
Since 2011 when Rousseff took office, the boom in Brazil’s commodities-driven economy has fizzled. Her stimulus efforts only helped to increase private and public debt without triggering growth. During this year, she reversed course by attempting to reduce government expenditure and subsidies as the central bank deals with inflation. Her governing coalition has experienced cracks due to the austerity program. Consumer and business confidence have remained lower than never.
Investment dropped by 8.1 percent in the second quarter. This was its eighth straight plunge. During the boom years, household consumption was an economic engine. It also took a downward slope by falling 2.1 percent, the worst plunge since 2001. Some of the factors that have fueled these sorrow situations in Brazil include tighter credit, rising unemployment, and the highest inflation in more than ten years.
The chief economist with SulAmerica Investimentos, Newton Rosa, affirms that the fall in consumption displays the crisis of confidence facing the economy. “Brazil should be prepared for a prolonged and intense recession. Brazil cannot hope for a recovery until at least mid next year.”
The second quarter last year witnessed an economic contraction of 2.6 percent.
The globe is in fear of facing crippled growth in this year due to fragile emerging markets such as Brazil. China’s slowdown is already posing a threat to African and Latin America exporters.
Brazil once enjoyed a nice time in exporting its iron ore and soya beans to the ravenous China. However, the economic crisis in China has contributed to a recession in consumer defaults, industrial surveys, and online retail sales.
Months of grim indicators had made financial markets to expect poor growth data. The Brazilian Real fell 1% against the dollar and the Bovespa index was 0.1% lower. This year saw the Real depreciating 25% against the dollar and the Bovespa losing 5%.
Mounting Political Crisis
A mounting political crisis has resulted from the economic slump.
Recent polls showed Rousseff’s approval rate decreasing to single digits, thanks to the recession and increasing evidence of a kickback scheme that funneled many dollars away from firms run by state. The scandal has led to the jailing of several executives from Brazil’s biggest engineering groups. Some accounts have also been frozen. Consequently, major investments in the energy sector and public works have taken a nosedive.
Rousseff is also facing a hard time in fighting her opponents due to political fallout from the scandal. The opposition is now crying for her impeachment and her austerity efforts are becoming weak. Polls indicate that two in three Brazilians want her ouster, even though there is no enough legal basis to support her impeachment.
Slipping fiscal targets
The second quarter saw government spending rising 0.7%. On Friday 28th August, separate fiscal data indicated a bigger-than-expected budget deficit in July. Thus, the government may not be able to meet its already lower fiscal target for the year.
Credit rating agencies have downgraded Brazil this year. More downgrades are looming if the government fails to close a budget gap and establish a foundation for economic boom.