Brazil enters recession as post-COVID revival fails | Business and Economic News

The blow to economic growth has come at a time when President Jair Bolsonaro is once again preparing for the election campaign.

Brazil’s economy collapsed as extreme weather conditions, high interest rates and inflation cut off the pandemic’s resurgence, giving President Jair Bolsonaro a slap in the face as he prepared for his election campaign.

Gross domestic product fell by 0.1% in July and September, after a revised 0.4% fall in the second quarter. A year ago, the economy grew by 4%, the National Statistics Agency said on Thursday.

The downturn poses growing challenges for Latin America’s largest economy. Unemployment is above 12%, annual inflation is at an all-time high for five years, and the central bank has launched the world’s most aggressive tightening campaign this year. Although most countries are experiencing high growth after the coronavirus, Brazil is losing strength despite the removal of pandemic-related restrictions and the expansion of the vaccine push.

The data released traders ’bets that the central bank could be even more aggressive in holding on to inflation. Contract exchange rates in January 2023, which indicate Selic’s benchmark expectations by the end of 2022, were down 22 basis points by mid-morning to 11.6%.

“There is a sense of paralysis,” said Sergio Valek, chief economist at MB Associados, adding that policymakers will be more cautious about raising interest rates in the coming months. “In the second quarter the economy reached a high level and stayed there, and some sectors, such as agriculture, suffered a lot.”

Brazil’s massive agricultural sector fell 8% in the quarter amid droughts and frosts, while industry was flat. On the other hand, consumption of services and households rose by 1.1% and 0.9%, respectively, according to the statistics agency.

Challenges in Brazil

Many of Brazil’s ills are out of its control: global supply chain disruptions, climate change that has damaged agricultural land, and higher commodity prices are helping to drive inflation into even higher borrowing costs.

Traders are betting on an interest rate hike of at least 150 basis points at next week’s policy meeting, which would bring Selic to 9.25%. GDP data could lead to a blackening of the central bank’s stance in recent months, according to William Jackson, an economist at Capital Economics.

“With tightening financial conditions, worsening trading conditions and the threat of a new Omicron variant, the risks of a 1.3% GDP growth forecast are worsening downward,” Jackson wrote in a research note on Thursday.

Part of the economic pain is self-inflicted. Investors are increasingly concerned about public finances as the government pushes for changes to a key austerity law to encourage social spending before Bolsonaro’s 2022 vote. These concerns have caused the real to lose about 8% of its value against the dollar this year, despite rising interest rates.

Analysts surveyed by the central bank have lowered their GDP forecasts over the past two months as questions about Brazil’s fiscal trajectory grow. Economic growth is expected to slow to less than 0.6% next year, from 4.8% in 2021.