Brazil's Economic Malaise Deepens as Unemployment Rate Surges to Five-Year High

08/24/2015 - 10h42

Brazil's unemployment rate rose sharply in July to its highest level in five years, in the latest sign of the country's economic malaise as policymakers struggle to turn round a deepening recession and quell a growing political crisis.

Unemployment rose for the seventh straight month, hitting 7.5 per cent. That is up from 6.9 per cent in June and much worse than the 7 per cent the market had forecast.

The figures rattled investors. The real fell by 0.8 per cent in early trading before rallying to trade 1 per cent higher at R$3.4576 against the dollar. Brazilian stocks dropped by as much as 1.2 per cent.

The growth prospects for Brazil, which is already struggling with the fallout from the collapse in global commodity prices, have become much gloomier in recent weeks as political infighting threatens to derail President Dilma Rousseff's attempt to put the country's fiscal house in order.

Joaquim Levy, finance minister, was forced last month to revise the government's target for balancing the budget this year as a steep downturn crushed tax revenue.

In response, Standard & Poor's cut its outlook on Brazil's credit rating to negative - raising the risk that the country could lose its coveted triple B minus investment grade status.

Against this backdrop, economists have been slashing their forecasts for Brazil. The latest survey of 100 economists published by the Brazilian central bank showed that the economy is expected to contract more than 2 per cent this year, making it the country's deepest recession in a quarter of a century.

Hopes that the economy will rebound next year have also been dashed with consensus pointing to a 0.15 per cent contraction in 2016.

The rise in unemployment is the latest blow for Ms Rousseff, as popular anger mounts over the stuttering economy and the corruption scandal at state-owned oil company Petrobras.

Hiring and firing employees in Brazil is an expensive process. Companies tend to hold off from laying off workers if they think there is a chance they may soon have to rehire them.

So the steady increase in unemployment since the start of this year suggests that the economic downturn caused first by the collapse in global commodity prices - and later exacerbated by the scandal at Petrobras, which has paralysed large parts of the construction and energy sectors - has taken employers past the point at which they can no longer avoid job cuts.

Rising unemployment is expected further to put the brakes on consumer spending, a key engine behind the country's decade-long economic boom.

However, with consumers already reeling from rising inflation, high interest rates, reduced benefits and a sharply weaker real, economists say the rise in unemployment should be enough reason for the country's central bank to take a break from the aggressive tightening cycle that has taken interest rates to a nine-year high of 14.25 per cent.

"July's spike in unemployment is another sign that Brazil's interest rate hike cycle is over," said William Adams, senior international economist at PNC Financial Services Group.

(c) 2015 The Financial Times Limited