SÃO PAULO — Disappointing levels of investment, confidence and competitiveness means Brazil’s economy will barely grow this year, according to a key report by the International Monetary Fund published on Tuesday.
The October edition of the global lender’s flagship World Economic Outlook report slashed its July estimate of 1.3 percent to 0.3 percent, which, if confirmed, would be the second worst performance by the Latin American economic powerhouse since 1998.
Currently the world’s seventh economy, Brazil should grow more in 2015, the report says, but still less than previously predicted, revising down a previous estimate of 2.0 percent to 1.4 percent.
“In Brazil, GDP contracted in the first half of the year, reflecting weak investment and a moderation in consumption, given tighter financial conditions and continued weakness in business and consumer confidence,” the IMF report said.
After shrinking 0.2 percent in the first quarter, economic output fell 0.6 percent in the second quarter, putting Brazil into a technical recession – defined as two consecutive quarters of negative growth.
“These factors, along with weakness in competitiveness, are projected to keep growth subdued in much of 2014–15,” the report continued, adding that higher external borrowing had increased the country’s exposure to external funding risks.
The global lender said it believed “raising domestic saving rates, including through stronger public finances” should now be a priority for Brazil, and its incoming government needed to “implement reforms to education, labor, and product markets to raise competitiveness and productivity.”
The IMF cut its growth forecasts for the wider continent, predicting Latin America would achieve growth of 1.3 percent in 2014, down from 2 percent “due to declining exports (and) domestic constraints.” Its prediction for 2015 was also revised down, from 2.6 percent to 2.2 percent.
The Fund trimmed its global forecast from 3.4 percent in July to 3.3 percent in Tuesday’s report, in which it highlighted an increasing gulf between a recovering U.S. economy and a cooling in the Euro zone and Asia.
It said a number of Brazil’s fellow emerging markets, such as China and Russia, were also seeing a slowdown in growth.
Although not unexpected, the news will be yet another blow to Brazilian President Dilma Rousseff’s economic track record, as she prepares her second-round campaign for a runoff for the nation’s highest office on Oct. 26.
The government still predicts 0.9 percent growth in 2014, but the latest market forecast stood at 0.24 percent. When elected in 2010, Brazil was booming at 7.5 percent growth, but has since slowed considerably during her first mandate.
Although the Workers’ party candidate won Sunday’s first round with 41.6 percent of the vote, Social Democracy Party candidate and market favorite Aécio Neves took a surprisingly strong 33.6 percent of votes, and the runoff is expected to be tight.
Experts told the Anadolu Agency (AA) on Monday that the economy would play a leading role in the presidential runoff.
Rousseff has vowed to take Brazil back to growth, citing the country’s record low unemployment and increases to the minimum wage to defend her record, but says she will not force the country through painful fiscal adjustments that could increase joblessness or threaten the ruling government’s flagship social benefits programs.
However, the markets view Rousseff as overly interventionist and have sided with Neves, the incumbent’s pro-business, centre-right rival, who has vowed to halve the number of ministries in a bid to cut public spending, as well as raising fuel prices.
The markets reacted positively on Monday to news that Neves would be facing Rousseff in the runoff, with the Bovespa stock exchange rose 8 percent when it opened; gains also continued on Tuesday, albeit at a slower rate.