Brazil falls into recession as election looms

Laura Bonilla Cal
Aerial view of the port in Rio de Janeiro, Brazil, on June 28, 2014
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Aerial view of the port in Rio de Janeiro, Brazil, on June 28, 2014 (AFP Photo/Yasuyoshi Chiba)

Brasília (AFP) - Brazil, Latin America's largest economy, has slid into recession, further weakening President Dilma Rousseff, who faces an increasingly tough re-election battle on October 5.

GDP shrank 0.6 percent in the second quarter, Brazil's national statistics institute said Friday, and revised its formerly positive growth estimate for the first quarter down to -0.2 percent.

Coming ahead of October presidential and general elections, those figures will damage already low industrial and consumer confidence in what once was a fast-growing regional powerhouse.

The contraction comes with Rousseff locked in a tough fight to win another term in office, with latest polls indicating a major surge in support for Marina Silva, challenging her from the left.

An opinion poll showed for the first time Silva tying Rousseff in the election's first round, with both candidates receiving 34 percent of the vote, and Silva pulling ahead by 10 percentage points in a runoff.

Previous polls had Silva trailing in the first round.

Silva, a former environment minister under Rousseff's predecessor Luiz Inacio Lula da Silva, shot to prominence after Socialist candidate Eduardo Campos died in a plane crash on August 13.

She had been Campos' running mate and took the reins of his campaign.

"Technically, we are in recession... and this is very worrying," Silva said. "Brazil must regain credibility -- that is the only way it will return to growth."

Rousseff shrugged off the latest economic data, saying it was in part due to a slew of public holidays which the government granted during the month-long football World Cup in June-July.

Citizens enjoyed an afternoon off on Brazilian match days and host cities also had a holiday every time they hosted a game, dampening economic activity.

"I think this result is just a blip. Brazil has every chance of a resumption" of growth later in the year, Rousseff insisted.

While most eyes were on football, industrial activity dipped 1.5 percent in April-June and second quarter investment slumped 5.3 percent, the IGBE national statistics agency figures showed.

Rousseff's administration has cut growth forecasts for the year to 1.8 percent, primarily blaming the global crisis.

But Silva's rise in the polls has put the incumbent on the back foot.

- 'Poor record' -

"The data are likely to be seized upon by Dilma Rousseff's challengers in the presidential race to attack her poor record on growth and inflation," said Robert Wood, Brazil analyst for the Economist Intelligence Unit.

The Sao Paulo stock market took Friday's data in its stride with the main Bovespa index ending the final August session 1.65 higher for a 9.63 percent rise across the month as a whole.

The market welcomed the weak growth data and Rousseff's current poll woes as positives which suggest her tenure may be coming to a close, the website of Valor financial daily reported.

Traders also welcomed Silva's pledge as she fleshed out her policies Friday by promising to "develop capital markets" and foster a healthy investment environment.

Margarida Gutierrez, an economics professor at Rio University, warned 2015 would be tough.

"Brazilian growth has been slowing since 2011 owing to the great uncertainty surrounding economic policy and large degree of state intervention," Gutierrez told AFP.

"This year brings additional uncertainties -- the elections, the risk of electricity rationing and adjustments which will have to be made in 2015."

Forecasts for 2014 are for GDP to rise just 0.7 percent, for a fourth straight year of sluggish growth, which had raced ahead by 7.5 percent in 2010.

- 'Growth pangs' -

Analyst Andre Perfeito of consultancy Gradual Investments said: "This is very much going to affect Dilma."

But he added: "Brazil is not broke." Many commentators forecast a return to growth in the second half of the year.

In a note to investors, BNP Paribas said: "Some observers may hesitate to characterize Brazil's current situation as a 'recession' on the grounds that Q1 growth was not sufficiently negative.

"Beyond the semantics, though, one thing is clear: Brazil is seeing poor growth and high inflation at the same time."

Economist Caio Megale told Valor that "the fall is in large part temporary and linked to the effects of the World Cup -- though part of this slowdown is more structural, owing to higher interest rates (currently 11 percent) and a tail-off in confidence."

Perfeito said he did not believe that the economy was broken and many forecasters and the government predict a return to growth for June-December.

He concluded: "Brazil is going to continue growing -- it is currently enduring growth pangs."