Brazil’s economy tumbles into recession weeks before presidential election

Brazil fell into a recession in the first half of the year as investment fell sharply and the country's hosting of the World Cup suffocated economic activity, a major blow to President Dilma Rousseff's already fading hopes for re-election in October.

Latin America's largest economy has suffered stagnant growth for more than three years under the economic policies of the left-leaning Rousseff, which have dented consumer and business confidence and caused heavy losses for financial investors.

The economy took an even bigger downturn in the second quarter, with gross domestic product contracting 0.6 percent from the first quarter, government statistics agency IBGE said on Friday. It also revised lower its estimate for first-quarter activity to a 0.2 percent contraction, meaning the economy entered a recession.

The data that confirmed the recession, Brazil's first since the global financial crisis of 2008-09, gives a powerful weapon to Rousseff's opponents in the Oct. 5 election at precisely the moment that her candidacy is at its most vulnerable.

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Polls over the last week have shown Rousseff falling behind centrist candidate Marina Silva in the event of a second-round runoff, which appears likely.

Silva and the other main opposition candidate, Senator Aecio Neves, have strongly criticized Rousseff for being weak on inflation and ruining the economic momentum that made Brazil a Wall Street darling last decade.

"This is the last thing that the government would have wanted or needed. But I think it's too late to turn [the economy] around" before the election, said Neil Shearing, an economist at Capital Economics in London.

Brazil's economy grew an average 4 percent under Rousseff's predecessor, Luiz Inácio Lula da Silva, from 2003 to 2010. Growth under Rousseff's watch is set to average less than 2 percent.

Brazil's stock market rose slightly, as investors focused less on the bad economic report and more on the increasing possibility that Rousseff might not be re-elected. One equities investor on Wall Street e-mailed simply: "Hallelujah."

Despite Rousseff's recent drive to win back business confidence, investment slid 5.3 percent in the second quarter, its worst performance since early 2009. Manufacturing suffered its fourth straight quarterly decline, down 1.5 percent.

Business activity also slowed as Brazil hosted the World Cup soccer tournament in June and July. Many cities declared public holidays on game days to prevent traffic problems and other logistical issues. Some factories began ramping down production before the tournament started in anticipation of disruptions.

Rousseff and her economic team have blamed the slowdown on continued problems abroad, such as in southern Europe.

"I want to emphasize that even really organized countries are having problems getting better growth," Finance Minister Guido Mantega told reporters.

He said gross domestic product data suffered because of unique, seasonally related statistical effects, and stressed the unemployment rate has been low and stable. As a result, he said he believed Brazil's situation did not really constitute a recession.

COMMODITIES DEMAND SLACKENS

Global demand for Brazil's major commodities such as iron ore, sugar and corn also slackened, compared to the glory days of last decade, when the economy often grew more than 5 percent a year, lifting some 35 million people out of poverty.

However, economists and business leaders said Brazil's recent problems are mostly home grown, and are far deeper than any short-term considerations such as the World Cup.

They have repeatedly complained of what they describe as Rousseff's heavy-handed management of the economy – such as alternately raising and lowering certain taxes. They said her policies have relied too much on stimulating domestic demand at the expense of investment.

Other Latin American countries such as Chile or Colombia, where trade accounts for a bigger percentage of the economy and the business climate is perceived as better, have enjoyed much stronger growth in recent years.

Economists said Brazil's next president – whoever it may be – would need to undertake deep reforms.

"We need a new economic program," said Eduardo Velho, chief economist at INVX Global, an investment fund in Sao Paulo.

Following the data, some economists said they would revise down their forecasts for full-year economic growth to zero.

Brazil's central bank raised interest rates earlier this year to counter a spurt in inflation, which contributed to the slowdown in the second quarter.

The second-quarter GDP drop was worse than expectations of a 0.4 percent contraction, according to the median forecast of 47 analysts polled by Reuters.

Other data released on Friday showed Brazil posted a primary budget deficit in July for a third straight month. Brazil's faltering growth has hurt tax revenues, making it harder for Rousseff's government to pay down debt.