Brazil's recession bad news for Rousseff reelection bid

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Friday, August 29, 2014

Nearly a month before the October 5 general election, figures confirming that Brazil's economy fell into recession in the second quarter could dampen President Dilma Rousseff's reelection bid.

Latin America's largest economy contracted for a second consecutive quarter in Q2, when it shrank a seasonally adjusted 0.6% from Q1, according to statistics agency Ibge. First-quarter GDP was revised down to a seasonally adjusted 0.2% contraction from a growth of 0.2%.

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"With her lead in the polls having evaporated in recent weeks, today's Q2 GDP data were the last thing that President Rousseff needed," said Capital Economics.

Newly-minted presidential candidate Marina Silva has emerged as Rousseff's main threat after the recent death of her running mate Eduardo Campos.

A recent poll from Ibope has Silva beating Rousseff in a runoff. Rousseff would get more votes than Silva in the first round but fail to clinch 50% plus one vote to clinch the election.

The anemic economy and high inflation (currently running at about 6.50% annually) have eroded support for Rousseff this year.

The Brazilian economy is suffering from a deep-rooted confidence problem due to policy-making volatility and strong government intervention in the economy. The uncertain outcome of the election has led much of the private sector to sit on the sidelines until a winner emerges, said Nomura Securities.

SLASHING GROWTH FORECASTS

The poor performance of the Brazilian economy in H1 prompted international firms to make major cuts to their growth forecasts. Capital Economics slashed this year's full-year growth forecast to 0.2% from 1.5% and to 1.3% from 2.0% in 2015.

Goldman Sachs reduced its 2014 growth projection to 0.25% from 0.75% and said it expects the economy's weak expansion to continue next year.

Brazil's ever-optimistic finance minister Guido Mantega said that the economy's weak performance during the first half was mainly due to transitory factors – including a severe draught, fewer working days (due to the World Cup), a very slow global economic recovery – and that the Brazilian economy would perform better in the second half.

For next year, Mantega expects GDP growth of 3% and a year-end inflation rate at 5%.

Brazil's GDP expanded 2.5% in 2013, which in itself was viewed by the local authorities and international analysts as a disappointing performance from one of the world's largest emerging markets.