Brazilian Economy Contracts in the First Quarter

June 1, 2015Brazilby EW News Desk Team

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Brazil's economy receded 0.2 percent in the first few months of 2015, and analysts expect the lack of growth to continue. Analysts believe Brazil's GDP will shrink by 1.2 percent for 2015, which will be the nation's largest decline in 25 years. Brazil's annual inflation rate stands at 8.17 percent, exceeding the government's threshold of 4.5 percent.

Andre Leite, an analyst from the Brazil-based consulting firm TAG Investimentos, describes the situation in Brazil as "very bad" and warns of "tough times for the economy." The agriculture sector grew 4.7 percent, but Q1 slowdown was mostly attributed to the service sector contracting 0.7 percent, and the industrial sector underwent a 0.3-percent decline. Consumption fell by 1.5 percent, and the nation's job prospects look weaker by the day. The labor force not only suffered a loss in wage expansion, but also lost 100,000 jobs in April. The unemployment rate also increased to 6.4 percent that same month.

The government slashed the budget to manage the economy, but economists believe the cuts will lead to greater contraction. However, the cuts are necessary after years of excessive spending, which was considered a hallmark of President Dilma Rousseff's first term in office, including far too much state intervention in the economy that made many investors nervous.

Rousseff has raised taxes and cut spending since her reelection to regain investor trust, but the issue of corruption continues to tarnish Brazil's reputation. The country is reeling from a massive kickback scandal involving state-owned Petrobras, and the fallout is part of the reason why the economy is in such decay. According to prosecutors, executives from the oil firm bribed politicians and inflated construction contracts for decades, amounting to $2 billion in kickbacks. The effects of the scandal will linger as investors lose faith in the government and the state of the economy. Shareholders have filed a lawsuit against Petrobras for allegedly being misled about the firm's assets, among other false claims. Overall, Petrobras lost $7.2 billion in 2014, losing heavily to low oil prices, and the firm has a total debt of $116 billion.

Rousseff's approval ratings have plummeted because of the scandal and the lack of economic growth, and her party, the Workers' Party, has suffered from the scandal. Many are calling for the president's impeachment, but such a move is unlikely given that Rousseff has not been implicated in the affair. However, others call for her impeachment for failing to manage the economy effectively. With that being said, external factors are stalling economic progress, such as a decline in world commodity prices, which is not only affecting Brazil but also other nations throughout South America.

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