Brazilian Economy Hits A BRIC Wall And Goes Into Recession

Brazil's economy, once an emerging-market darling, fell into recession, according to government data released Friday, as millions of new middle class citizens tightened their belts and further dampened a credit-driven spending spree.

The results are a blow to President Dilma Rousseff, who faces an increasingly tough reelection in October. A new poll released late Friday showed her biggest rival pulling into a dead heat with her in a first-round vote — and is 10 percentage points ahead of the Rousseff in an expected runoff ballot.

The government's statistics bureau reported that gross domestic product dropped 0.6 percent in the second quarter, in large part because of soft consumer spending. First-quarter results also were revised downward from 0.2 percent growth to a 0.2 percent drop, showing a two-quarter slide that most economists use to define a recession.

Analysts said the economy also suffered because investors are holding off, waiting to see how the October election changes the economic winds.

Even the World Cup played a part in Brazil's doldrums because workers took many days off, contributing to weak industrial output.

But the heart of the problem is a crisis for the government's model of consumption-led growth, which many economists say is played out.

"Of course I'm spending a lot less!" said Maria Sousa, a 25-year-old doing some window shopping but no buying at a mall in Rio de Janeiro. "I'm feeling less confident about my financial situation and I'm thinking more about trying to save than spend."

London-based Capital Economics wrote in a research note that "it is consumption that has been the key driver of growth since the 2009 global financial crisis. But consumers are now struggling, in part because household balance sheets have become stretched following a decade-long credit boom."

After blistering 7.5 percent growth in 2010, Brazil's economy has limped along. The long, slow slide means there aren't any regional shocks expected from the official drop into recession, but it still darkens the horizon for Brazil's neighbors, many of whom send a large percentage of their exports into the nation.

Argentina, whose economy is in recession and where citizens face inflation of 40 percent, may be hurt the most. About one-fifth of Argentina's exports flow into Brazil, but the amount Brazilians buy is forecast to shrink.

"It's another headwind for Argentina, at exactly the wrong time," said Neil Shearing, chief emerging markets economist at Capital Economics.

Brazil itself has been hurt by falling demand for its cars and big-ticket household items like refrigerators and washers in Argentina, one of the reasons Brazilian industrial output fell for the fourth consecutive quarter.

Analysts said that to return to its days of fast growth, Brazil must undertake long-delayed reforms to its tax system, labor laws and bureaucracy.

Brazil remains a grindingly difficult place to do business. It ranked 116th on the World Bank's most recent "Ease of Doing Business Index," despite being the world's seventh-largest economy.

Brazil's taxation regime was billed as the globe's most complicated and burdensome, according to this year's comparison of tax systems in 189 nations carried out by accounting company PwC, along with the World Bank and the International Finance Corporation.

That adds to bottlenecks at every turn when Brazil tries to capitalize on its potential, analysts say.

The economic indicators are the last thing Rousseff's struggling re-election campaign needed.

The slump gives more ammunition to Rousseff's rivals ahead of the Oct. 5 presidential election vote, particularly for environmentalist Marina Silva, who is now leading polls and tapping into the widespread frustrations of many Brazilians with a sputtering economy and poor public services, angst that fueled last year's massive anti-government protests.

The race is certain to go into a second-round runoff on Oct. 26, as no candidate has the support win an outright majority of ballots to avoid that.

"For Rousseff, who has watched her lead in opinion polls evaporate in recent weeks, this is the worst possible news; it's the last thing she wanted," said Shearing. "There is not much that can be done for the economy ahead of the election. It's like turning around the proverbial tanker; it's going to take a long time."

Respected polling group Datafolha said Friday night that Rousseff and Silva are now even, each capturing 34 percent of voter intentions in the first round.

But when asked about a second-round runoff, Silva opened a wide lead over Rousseff, taking 50 percent to the incumbent's 40 percent.

The poll, aired Friday on Globo TV, was based on 2,874 interviews carried out across Brazil on Thursday and Friday. The margin of error was 2 percentage points.

Earlier Friday, Rousseff's team argued that Brazil's souring economic scenario wasn't their fault — and questioned whether the country is in recession.

They blamed the slowdown on continuing global economic weakness that has dampened appetite for Brazil's exports and a severe drought that has sent energy prices soaring for industry and consumers alike, as most of the country is powered by hydroelectricity.

"The international scenario didn't help," Finance Minister Guido Mantega told reporters in São  Paulo. "There's a lack of market (in developed economies) and that's resulted in a trend of deceleration for emerging economies."

Asked if Brazil is in a recession, Mantega said, "You can't really say that." He emphasized that unemployment remains at historic lows and inflation is within the upper limits of the government's tolerance band.

"There are not universally accepted criteria for defining a recession. You can't talk about a recession in Brazil because, for me, a recession is when you have a prolonged stall, of many, many months. And a recession is when you have unemployment."

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