Economy Drops 0.6% in Q2, Brazil Enters a Technical Recession

08/29/2014 - 12h14

Under a negative impact from the World Cup, the restraint of household consumption and strong investment retraction, Brazil's GDP fell 0.6% in the second quarter compared with the first three months of this year.

Compared to the second quarter of 2013, the country's economy shrank by 0.9%. The data was released by IBGE this Friday (29).

As the result of the first quarter was revised to a drop of 0.2% (as opposed to a high of 0.2% previously reported), according to most economists, the country entered a technical recession.

The term, however, is controversial. Some specialists question the traditional approach of considering that the fall in GDP for two consecutive quarters means a technical recession. They argue that the two recessions are small and unemployment in the country is low.

To Silvia Matos, of FGV (Getulio Vargas Foundation), the fact that the economy contracted for two quarters is not necessarily a recession, as the drop rates are moderate (especially the first quarter, which was revised) and the job market, which was already slowing, is not yet in crisis.

She acknowledges, however, that many economists evaluate the situation as recessive.

In terms of value, the country's GDP totaled R$ 1.271 trillion in the second quarter.

According to Rebecca Palis, the IBGE manager responsible for the GDP, revisions are necessary to apply the seasonal adjustment in GDP, which allows for comparison with the previous quarter, excluding effects typical of each period (such as fixed holidays and higher volume of concentrated crop in one quarter).

Palis said we "need to be careful" with rates very close to zero, like that of the first quarter (revised from 0.2% to -0.2%), which can again be positive after further review to be applied in calculations of the third quarter.

WORSE THAN EXPECTED

The results presented by IBGE were worse than market forecasts. The average forecast of banks and consultancy agencies pointed to a fall of 0.4% compared to the first quarter and 0.5% compared to the same period in 2013, according to Bloomberg research.

With the result of the second quarter, the Brazilian economy is up 0.5% in the first six months of this year and is moving toward, according to analysts, closing the year with a growth of just 0.7%. If confirmed, the projection will be the worst performance since 2009, when the drop was 0.3%, recorded at the height of the global crisis.

In the last four quarters ending in June, the GDP totaled a high of 1.4%.

The time from the first to second quarter dictated the drop of the GDP for industry and services, with falls of 1.5% and 0.5%, respectively. Farming had a slight increase of 0.2%.

When looking at the economy from another angle (the destination of the output generated by these three major sectors), household consumption, the item that holds the greatest weight in the composition of the GDP, grew by only 0.3%.

Investments in machinery for production, transportation, agriculture, energy and construction, among others, had a strong decrease of 5.3%. This component is considered the most important of the GDP because it suggests how the economy will be able to grow in the future by increasing its production capacity and infrastructure.

Even government consumption (in the purchase of inputs for healthcare, education and other public servies) fell 0.7%.

WORLD CUP AND STAGNATION

For Silvia Matos, an economist at FGV, the fall of the GDP was expected. The effect of the World Cup, she said, was felt the most in June, at the beginning of the competition. This was because there was a greater accumulation of out-of-the-ordinary holidays in the host cities and early-dismissal days for employees.

With fewer people to produce, the economy recessed. "A stagnation or a slight drop was expected, but the Cup helped make the result a bit worse."

Since the end of 2013, the GDP has been stagnant, following the credit boom and under the effect of higher interest rates and defaults. Indebted, families no longer have the same urge to spend. The higher inflation this year (and concentrated on food) also eroded their income, which stopped the consumption of less essential goods.

Investments, in turn, suffer from lower business confidence and also from higher interest and banks that are less likely to lend due to economic uncertainties in the country.

INDUSTRY

From the perspective of production, the industry feels the reflexes of lower consumption (especially of higher value goods, likes vehicles) and the increasing competition with products from abroad. Even services that sustained the GDP have already showed contraction in the wake of the industry's crisis (which hires transportation services, consulting and outsourcing companies, as well as others) and the consumption of homes nationwide.

Another factor that inhibits consumption is the cooling of the labor market, according to Ramos. Income is growing less and the generation of jobs is weak. In large metropolitan areas of the country, the situation is worse: there has been a drop in the number of employed workers.

Translated by JILL LANGLOIS

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