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Recession fears mount as Brazil economy grinds to halt

Official figures published later on Friday are expected to confirm that Brazil ground to a halt in 2014, putting on the brink of a recession this year. The slump will pile the pressure on new finance minister Joaquim Levy to find a path to long-term sustainable growth for Latin America’s largest economy

Fears that Brazil is set to plunge into a deep recession this year will be compounded by official figures being published later today that are expected to show that the economy ground to a halt in 2014.

The outlook is likely to get worse as Brazil is expected to dive into a deep recession this year as a result of an explosive mix of fiscal adjustment, high inflation and the worsening Petrobras corruption scandal.

Fiesp, the São Paulo industry federation, expects the economy to contract by 1.7% this year. The industrial sector is expected to plunge by 4.5% after a 1.8% decline last year, it said. Industry has been hit by the decision by the new finance minister Joaquim Levy to cancel many corporate tax breaks in his latest fiscal package.

The investment rate, one of the traditional weaknesses of the Brazilian economy, is expected to fall by more than 8% this year, according to Fiesp, which blamed “the ongoing substantial fiscal adjustment”, the strong increase in government-regulated prices, including energy, and monetary tightening, which has a detrimental impact on credit.

The steep decline in both business and consumer confidence has led banks such as BNP Paribas to cut their growth forecast to -2%. The figure may be even worse if water and electricity rationing materialise.

But Levy is confident that the Brazilian economy will bounce back. Writing in Emerging Markets in a column to be published on Sunday, Levy says he believes “the measures that have been implemented since January are capable of leading us to the required fiscal effort, reinstate investor confidence, and pave the way to a new cycle of growth, less dependent of commodity prices”.

Levy eyes growth

After initial difficulties Levy, who is not a politician, has been working more closely with Congress, which he now describes as a “partner”. With a massive austerity effort underway, the planning and budget minister Nelson Barbosa, who is Brazil’s governor at the IADB, has cancelled his trip to Busan at the last minute and will not attend the bank’s annual meeting.

Standard & Poor’s was the first international credit rating agency to give the benefit of doubt to Levy’s policies when it reaffirmed Brazil’s rating this week, in spite of the deterioration of the various economic and financial indicators, including growth.

Nevertheless, this cannot be considered a vote of confidence. “This is the beginning of a change in the right direction,” said Roberto Sifon Arevalo, Standard & Poor’s managing director for Latin America. But he said “the jury [was] still out” as there were still uncertainties regarding the implementation of the fiscal adjustment plan.

“If we see things do not pan out the way they intended to, if there is more political infighting and the fiscal plan is watered down, this probably is not going to help,” he said, adding that the sovereign credit could again be reviewed within a year. Nevertheless, Standard & Poor’s supports the view that the Brazilian economy will bounce back next year, when GDP growth is expected to reach 2%.

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