Brazil in recession as drought and inflation hammer economy

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Brazilian President Jair Bolsonaro in Brasilia, Brazil, on February 24, 2021.
Brazilian President Jair Bolsonaro in Brasilia, Brazil, on February 24, 2021.
EVARISTO SA/AFP via Getty Images

Brazil's economy contracted slightly in the three months to September, government data showed on Thursday, as surging inflation and a severe drought triggered a recession in Latin America's largest economy.

The 0.1% decline in Brazil's gross domestic product (GDP) in the third quarter, reported by official statistics agency IBGE, was below a median forecast for zero growth in a Reuters poll.

Brazil's economic rebound from the worst of the COVID-19 pandemic has sputtered as inflation surged into double digits, forcing the central bank to raise borrowing costs aggressively.

The economic headwinds have weighed on President Jair Bolsonaro's popularity as he prepares to seek relection in 2022.

Revised data showed a 0.4% drop in the second quarter, worse than the 0.1% decline reported previously. Two straight quarters of contraction meet the definition of a recession.

Unusually dry weather this year has also hurt key Brazilian crops such as corn and coffee. Vanishing reserves at hydropower dams drove up electricity costs, adding to price shocks.

Agricultural production fell 8.0% in the third quarter, while industrial output was flat and services advanced 1.1%.

"With financial conditions tightening and inflation at multi-year highs, the services sector is likely to weaken," William Jackson, chief emerging markets economist at Capital Economics told clients in a note.

The weak economic data may lead the central bank to maintain the pace of interest rate hikes at next week's policy meeting, avoiding a larger increase that some had forecast, Jackson said.

Some economists are warning of a deeper downturn next year.

The market outlook for 2022 economic growth has fallen from 2.3% in June to less than 0.6% in the latest central bank poll of economists, released on Monday.

Brazil's Economy Ministry dismissed that consensus in a statement on Thursday, reaffirming its forecast of economic growth above 2% next year and pointing to recent job creation data as evidence of a resilient recovery.

Brazil's unemployment rate fell to 12.6% in the third quarter from 14.2% in the prior quarter, data showed this week, hitting the lowest point since the beginning of the pandemic.

Compared to the third quarter of 2020, Brazil's economy grew 4.0%, IBGE data showed, below a median forecast of 4.2% growth.

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