Brazil Economy Heads for Contraction in Setback to Bolsonaro

Mario Sergio Lima
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Brazil Economy Heads for Contraction in Setback to Bolsonaro

(Bloomberg) -- Brazil’s economy shrank in the first quarter, a key central bank activity index showed, dealing a setback to President Jair Bolsonaro’s pledge to accelerate the country’s recovery.

In March, activity slipped 0.28%, the third straight decline and worse than the economists’ median estimate for a 0.20% drop. In the first three months, the economy contracted 0.68% compared to the end of 2018, according to the index that is a proxy for gross domestic product.

If confirmed, it would be the first quarterly contraction in Latin America’s largest economy since 2016. A bout of confidence surrounding Bolsonaro’s election has been replaced with doubts over his ability to lure investments and implement crucial reform measures including a pension overhaul aiming to save over a trillion reais ($251 billion) in a decade. That’s prompted analysts to slash their growth estimates and the central bank to caution of more weakness ahead.

On Wednesday, Goldman Sachs cut its first quarter GDP estimate to -0.1% from 0.2% previously, according to a research note by chief Latin America economist Alberto Ramos. The bank also lowered its 2019 full-year growth estimate to 1.2% from 1.7% previously.

In January, Bolsonaro took control of a country still scarred by a brutal recession in 2015 and 2016. He won investor accolades by pledging to cut debt and propel growth with the help of a pro-market economic team headed by the University of Chicago-trained Economy Minister Paulo Guedes.

Instead, signs are mounting that the recovery is running out of steam. One quarter of the labor force is either unemployed or underemployed. Industrial production in March had its worst reading in six months, while retail sales in the same period rose less than almost all analysts expected.

The central bank has held the benchmark interest rate at a record low for roughly a year in efforts to buttress activity. Still, in the minutes to its latest policy meeting, officials signaled that they won’t be able to add more stimulus until doubts over the government’s reform agenda are cleared up.

The national statistics institute, IBGE, will release first quarter GDP data on May 30.

(Updates with Goldman Sachs estimate in fourth paragraph.)

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