IMF sees Brazil recession in 2015, weighing down region

Laura Bonilla

Rio de Janeiro (AFP) - Brazil's economy will contract by one percent this year, weighing down Latin America as the region struggles to rekindle growth despite low commodity prices, the IMF said Tuesday.

Brazil, the world's seventh economy and Latin America's largest, is being hit by inflation, private-sector doldrums and a massive corruption scandal at state oil giant Petrobras, the International Monetary Fund said in its latest forecast.

"Private sector sentiment remains stubbornly weak because of unaddressed competitiveness challenges, the risk of near-term electricity and water rationing, and the fallout from the Petrobras investigation," said the Fund in its quarterly projections for the world economy.

"Greater-than-expected need for fiscal tightening also plays a role in the downward revisions."

That ratchets the pessimism up a notch from the IMF's previous two forecasts: In January, it predicted Brazil's economy would grow 0.3 percent this year, and in October it predicted growth of 1.4 percent.

The outlook is slightly better for 2016, when the IMF predicts one-percent growth, down from 1.5 percent in the previous forecast.

Brazil's central bank also expects a recession in 2015, but is predicting a smaller contraction of 0.5 percent.

The bleak forecast comes as Brazil's new Finance Minister Joaquim Levy works to overhaul the national budget and achieve a primary surplus of 1.2 percent of GDP this year, after the country finished 2014 with its first primary deficit since the current set of records began in 2001.

But the IMF warned fiscal tightening would come at the cost of a consumption slowdown.

Brazilian consumers are already struggling with high prices.

The IMF said it expects inflation to come in above the government's target ceiling of 6.5 percent for the year.

Brazil's economy grew 0.1 percent last year, its fourth straight year of disappointing growth and a far cry from the heady days from 2005 to 2010 when it averaged growth of 4.5 percent a year.

President Dilma Rousseff's government is facing a pile of discouraging economic data.

Annual inflation stands at 8.13 percent, with the central bank predicting it will come in at 7.9 percent this year; the current account and trade balance are both in the red; and even unemployment, long the most promising indicator, crept up from 4.8 percent to 5.9 percent in the first two months of the year.

- Regional slowdown -

Latin America as a whole will grow 0.9 percent this year, the IMF predicted, revising down its previous forecast of 2.2 percent.

The region is struggling to rekindle the economic magic of the commodities boom from 2004 to 2013, when Chinese-led demand for raw materials fueled average annual growth of 4.2 percent.

Regional economic growth declined for the fourth straight year in 2014, to 1.3 percent, the IMF said.

"With no apparent impulse for a near-term pickup in activity, lower commodity prices and reduced policy space in many economies, regional growth is projected at 0.9 percent this year... before recovering to two percent in 2016," it said.

The bad news is concentrated among South American commodity exporters, it said, slashing its 2015 growth projections for Bolivia, Chile, Colombia, Ecuador and Peru by 0.5 to 2 percentage points.

Argentina, the region's third-largest economy, is facing a contraction of 0.3 percent, and Venezuela, which has been hit hard by fiscal chaos and low oil prices, will contract by seven percent, it said.

The news is better in Mexico, the region's second-largest economy, whose trade ties with the rebounding United States will help it register growth of three percent this year and 3.3 percent next year, the IMF predicted -- both forecasts revised down by 0.2 percentage points.

The Fund urged the large emerging economies to implement structural reforms to increase productivity and sustainable growth.

In the case of Brazil, like fellow emerging economies China, India and South Africa, it needs to implement reforms in education, labor and product markets to raise competitiveness and productivity, the IMF said.