Brazil's worst-ever recession unexpectedly deepens in late 2016

BRASILIA (Reuters) – Brazil`s worst-ever recession intensified unexpectedly in the final quarter of 2016, data showcased on Tuesday, frustrating hopes for signs of a recovery and stepping up pressure on President Michel Temer and the central bank to do more to promote growth.

Brazil`s gross domestic product contracted by Three.6 percent last year, statistics agency IBGE said, following a Three.8 percent drop in 2015. The nation`s two-year downturn is the longest and deepest on record for Latin America`s thickest nation.

The economic spasm worsened in the fourth quarter, with a steeper-than-expected decline of 0.9 percent, following a 0.7 percent drop in the previous three months.

Investment tumbled Ten.Two percent in 2016, in a acute drop that is partly blamed by economists on Brazil`s chronically high interest rates.

The central bank commenced to cut its benchmark rate from a decade-high of 14.25 percent in October and is expected to take it to single digits this year.

The disappointing data fueled calls for the central bank to accelerate the tempo of rate cuts, presently running at seventy five basis points per meeting. Yields on rate futures demonstrated an enlargening chance of a steeper cut when the bank makes its next scheduled policy decision in April, according to traders.

«There`s a lot of idle capacity in the economy and that`s a reason for the central bank to budge quicker,» said Cristiano Oliveira, chief economist at São Paulo-based Banco Fibra, responding to Tuesday`s data.

The majority view among economists is that Brazil will emerge from recession in 2017, but at a very slow growth rate of 0.Five percent, which would be insufficient to reduce unemployment. The government has forecast growth of one percent.

Some economists tempered their views even further following the dismal spectacle in 2016.

«We see zero growth in 2017, or maybe just a little bit above that,» said Carlos Kawall, chief economist at Banco Safra, in São Paulo. «We should not see any big recovery this year; we will have to wait until 2018.»

GREEN SHOOTS SPROUTING Leisurely

Finance Minister Henrique Meirelles rebuked that pessimism by telling after the figures were announced that Brazil is «clearly» commencing to grow again, based on indicators ranging from cardboard and motorcycle production to supermarket sales.

A revised forecast for economic growth in two thousand seventeen will be announced by March 22, Meirelles said, taking into account the worse-than-expected fourth-quarter data.

Betting that investors` growing confidence in Brazil would hold, the government reopened on Tuesday a 10-year global bond seeking to raise at least $500 million.

Signs of an imminent recovery include a rebound in vehicle traffic, which shows up to have hit bottom in the fourth quarter, according to a senior executive at CCR SA ( CCRO3.SA ), the country`s thickest toll road operator.

Car output also hopped almost fifteen percent in February, according to the national automakers` association Anfavea, and farmers hope to harvest a record soy crop this year.

None of that, however, is likely to make for anything more than a shallow and underwhelming recovery, according to Goldman Sachs economist Alberto Ramos.

«A very powerless labor market backdrop and still high levels of household and corporate indebtedness should limit the strength of the recovery,» Ramos said.

TAX HIKES NOT RULED OUT

The downturn has left almost thirteen million people unemployed, caused a record number of bankruptcy filings and led agencies to disrobe Brazil of its hard-won investment grade credit rating.

It also contributed to the impeachment of former President Dilma Rousseff last year and to the low approval ratings of her successor, President Temer, whose agenda of budget and pension reforms has helped fuel a strong rally in Brazilian equities and currency since last year.

If the economy resumes to disappoint, tax revenues could fall brief of expectations, putting the country`s budget target at risk. Meirelles said the government could raise taxes or cut spending further if necessary to achieve its 143.1 billion reais ($45.87 billion) primary deficit objective.

Albeit this recession has been the deepest in Brazil`s history, it has not been marked by the financial upheaval seen in other crises in the country`s turbulent economic past.

Previous downturns were often accompanied by sovereign debt crises, capital flight and hyperinflation, none of which happened during the current slump.

Extra reporting by Camila Moreira, Rodrigo Viga Gaier, Marcela Ayres; Editing by Daniel Flynn and Tom Brown

Related movie: