Economy

Brazil in recession as drought and inflation hammer economy

Revised data showed a 0.4% drop in the second quarter GDP, worse than the 0.1% decline reported previously

Photo: REUTERS/Ricardo Moraes
  • Agricultural production fell 8.0% in the third quarter, while industrial output was flat and services advanced 1.1%;
  • The market outlook for 2022 economic growth has fallen from 2.3% in June to less than 0.6% in the latest central bank poll of economists.

Brazil‘s economy contracted slightly in the three months to September, government data showed on Thursday, as surging inflation and a severe drought triggered a recession in Latin America‘s largest economy.

The 0.1% decline in Brazil‘s gross domestic product (GDP) in the third quarter, reported by official statistics agency IBGE, was below a median forecast for zero growth in a Reuters poll.

Brazil‘s economic rebound from the worst of the COVID-19 pandemic has sputtered as inflation surged into double digits, forcing the central bank to raise borrowing costs aggressively.

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The economic headwinds have weighed on President Jair Bolsonaro’s popularity as he prepares to seek relection in 2022.

Revised data showed a 0.4% drop in the second quarter, worse than the 0.1% decline reported previously. Two straight quarters of contraction meet the definition of a recession.

Unusually dry weather this year has also hurt key Brazilian crops such as corn and coffee. Vanishing reserves at hydropower dams drove up electricity costs, adding to price shocks.

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Agricultural production fell 8.0% in the third quarter, while industrial output was flat and services advanced 1.1%.

“With financial conditions tightening and inflation at multi-year highs, the services sector is likely to weaken,” William Jackson, chief emerging markets economist at Capital Economics told clients in a note.

The weak economic data may lead the central bank to maintain the pace of interest rate hikes at next week’s policy meeting, avoiding a larger increase that some had forecast, Jackson said.

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Some economists are warning of a deeper downturn next year.

The market outlook for 2022 economic growth has fallen from 2.3% in June to less than 0.6% in the latest central bank poll of economists, released on Monday.

Brazil‘s Economy Ministry dismissed that consensus in a statement on Thursday, reaffirming its forecast of economic growth above 2% next year and pointing to recent job creation data as evidence of a resilient recovery.

Brazil‘s unemployment rate fell to 12.6% in the third quarter from 14.2% in the prior quarter, data showed this week, hitting the lowest point since the beginning of the pandemic.

Compared to the third quarter of 2020, Brazil‘s economy grew 4.0%, IBGE data showed, below a median forecast of 4.2% growth.

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