Brazil’s first recession in more than five years fuelled a rally in equities as investors bet President Dilma Rousseff will fail to get re-elected next month.
The Ibovespa extended its best month since January 2012, gaining 1.7 per cent to 61,288.15 today. The cost to protect the nation’s debt securities against non-payment for five years fell today to the lowest level since May 2013, according to data compiled by Bloomberg.
Gross domestic product shrank by 0.6 per cent in the April-June period from the previous three months, after contracting a revised 0.2 per cent in the first quarter, the national statistics agency said on Friday in Rio de Janeiro. It’s the first time Latin America’s biggest economy contracted for two consecutive quarters since the aftermath of the global financial crisis in 2008.
“This is the last thing that Dilma would have wanted, today’s data is the worst-case outcome for her,” Neil Shearing, chief emerging markets economist at Capital Economics Ltd, said by phone from London. “This is clearly going to put pressure on the central bank to loosen policy in order to support growth.”
Rousseff has struggled to revive the economy with tax cuts, billions of dollars in credit and higher social spending. With inflation hovering around the ceiling of the target range, consumer and business confidence has eroded in the run-up to the first round vote on October 5. Friday’s GDP result will give the two leading opposition candidates more fodder to attack Rousseff on her economic track record, said Juliano Ferreira, a strategy analyst at Icap do Brasil Ctvm.
“They’ll have better arguments to justify a change in the presidency,” Ferreira said by phone. “The chances of one of them winning is increasing, and that’s being reflected in market expectations.”
Former Environment Minister Marina Silva, who is leading in polls, vows to grant the central bank president a fixed term as quickly as possible as part of her policy to bring inflation to target. Her platform, published on Friday in Sao Paulo, says the government can reduce expenditures in part by relying on concessions and public-private partnerships.
Swap rates maturing in January 2017 fell six basis points, or 0.06 percentage point, to 11.20 per cent. The real rose 0.3 per cent to 2.2359 per US dollar.
Investments contracted 5.3 per cent in the second quarter from the previous three months, accounting for the bulk of the contraction in GDP, the national statistics agency said. Family consumption, sustained by increases in wages, rose 0.3 per cent.
Shearing cut his 2014 growth forecast to 0.2 per cent from 1.5 per cent after Friday’s report.
Price controls, currency interventions and regulatory changes in energy and other industries have pushed investors to the sidelines, Mauro Rochlin, a professor of economics at the Getulio Vargas Foundation, a Brazilian business school and research institute, said by phone.
“Excess government meddling in the economy has created a very bad business environment,” he said.
The biggest impact of the economic contraction on the electoral race may already have taken place, said Fernando Abrucio, a political scientist at the Getulio Vargas Foundation business school in Sao Paulo. Today’s data is two months old and partially offset by near-record low unemployment and rising income, he said.
“The data is already reflected in electoral polls,” Abrucio said. “It has more of an impact on opinion makers than on the electorate.”
Rousseff’s support is near her floor and could rise if she manages to discredit Silva for lacking executive experience, he said, giving the incumbent a 40 per cent to 50 per cent chance of winning against 50 per cent to 60 per cent for Silva.
Standard & Poor’s in March lowered its debt rating on Brazil by one level to BBB-, a step above junk, on slower economic growth and what it said were deteriorating fiscal accounts. The public sector posted a 32.7 billion-real nominal budget deficit in July, the largest since December 2008, the central bank said in a report today.
Finance Minister Guido Mantega said on Friday that growth would fall short of the government’s 1.8 per cent target and that it would be “difficult” to reach its primary budget surplus target of 1.9 per cent of GDP. On Thursday he said the economy will grow 3 per cent next year as the government tightens its budget, allowing the central bank to ease the “severe” monetary policy it implemented to slow inflation.
Jose Francisco de Lima Goncalves, chief economist at Banco Fator SA, said the economy won’t grow more than 1 percent next year.
“It will take time to see an economic recovery,” Lima Goncalves said in a phone interview from Sao Paulo. “The infrastructure bottlenecks won’t disappear. The consumption cycle is running out.”
The central bank on July 16 kept the benchmark interest rate unchanged at 11 per cent for the second straight meeting after lifting it by 375 basis points in the year through April. Brazil has the highest benchmark borrowing costs among rate-setting nations in the Group of 20.
Policy makers signaled plans to hold the key rate at the highest level in more than two years as inflation persists above the mid-point of its target even as demand eases.
Rousseff’s support fell before the elections as other candidates attack her economic policies, according to two polls released this week.
Silva would win 45 per cent of voters’ support in an October 26 runoff against Rousseff, who would garner 36 per cent, according to an Ibope poll published on August 26. The survey questioned 2,506 people on August 23-25 and had a margin of error of plus or minus two percentage points.
Silva has 43.7 per cent support in the second round, 5.9 percentage points more than Rousseff in an August 21-24 MDA survey published August 27, which has a margin of error of plus or minus 2.2 percentage points.
Rousseff doesn’t have the votes needed to avert a runoff, according to both polls.
Brazil’s economy slipped into recession for the first time in more than five years as investments contracted on lower confidence before the October presidential election. Here are some challenges the economy is facing
* Inflation is hovering around the upper limit of the target range
* Consumer and business confidence eroded in the run-up to the first round vote on Octobe 5
* Investments contracted 5.3% in the second quarter from the previous three months, accounting for the bulk of the contraction in GDP
* Price controls, currency interventions and regulatory changes in the energy and other industries have pushed investors to the sidelines
* Excess government meddling in the economy has created a very bad business environment
* Standard & Poor’s in March lowered its debt rating on Brazil by one level to BBB-, a step above junk
* Finance Minister Guido Mantega says growth would fall short of the government’s 1.8% target
* GDP shrank by 0.6% in the April-June period from the previous three months, after contracting a revised 0.2% in the first quarter