Brazil Economic Rout Deepens as Investment Shows No Rebound

(Bloomberg) -- Brazil's economic rout deepened in the fourth quarter as investors and consumers remained on the sidelines amid government austerity measures that marked a disastrous year of corruption and recession.

Gross domestic product contracted 0.9 percent in the final three months of 2016, its biggest decline in a year, after a revised 0.7 percent drop the previous quarter, the national statistics institute said Tuesday. That was worse than the median estimate for a 0.5 percent decline from 46 economists Bloomberg surveyed, and lower than all but four of their forecasts. For the full year Brazil contracted 3.6 percent.

Amid the biggest bribery scandal in the nation's history, Brazil's economic and political crisis has decimated both investment and consumption, while unemployment has now reached record levels. An economic recovery may remain elusive even as President Michel Temer wins investor praise for efforts to shore up Brazil's finances, and plunging inflation allows the the central bank to lower borrowing costs.

"The report confirms there is a lot of idleness in Brazil's economy," Cristiano Oliveira, chief economist at Banco Fibra, said by phone. "The central bank has a lot of room to accelerate key rate cuts."

Swap rates on the contract maturing in January 2019 rose two basis point to 9.68 percent at 11:32 a.m. local time in Sao Paulo. Brazil's currency, the real, gained 0.68 percent to 3.1162 per U.S. dollar.

Moments after the GDP figures were released, Temer vowed to push ahead with his reform agenda and highlighted some economic bright spots such as slowing inflation.

During the last three months of 2016, overall investment dropped 1.6 percent. It stood at 16.4 percent of GDP in 2016, down from 18.1 percent and 19.9 percent in the two preceding years, according to the statistics institute.

"There's no new evidence of where the economic activity is going to come from," Andre Perfeito, chief economist at Gradual Cctvm, said by phone. "It's not true that lower interest rates alone make for investment."

All in all, four of six sectors of the economy contracted in the fourth quarter, including a 0.6 percent decline in family consumption and a 0.8 percent percent drop in services that was its worst in more than a year, according to the statistics institute.

The fourth quarter results are a far cry from the government's initial bets that the recovery would start at the end of 2016. With economists forecasting less than one percent GDP expansion this year, policy makers are now banking on aggressive monetary easing and a series of economic and fiscal reforms to kick start Brazil's return to growth.

The central bank indicated last month that it wants to see more progress on fiscal tightening measures before it accelerates further the pace of key rate cuts. Temer's next big proposal -- an overhaul of Brazil's unsustainable pension system -- has drawn criticism from opposition lawmakers and labor unions, and will likely prove more difficult to pass than the spending cap approved last year.

Finance Minister Henrique Meirelles on Tuesday said the fourth quarter result reflects past policies, and proxies for sales show the economy is turning around. But few analysts expect a dramatic rebound.

"In real terms, GDP is now nine percent below its pre-recession peak. This is comfortably the worst recession in recorded history," Capital Economics' Chief Emerging Markets Economist Neil Shearing wrote in a report. "However, we suspect that the fourth quarter should also mark the end of the recession.”

--With assistance from Bruce Douglas

To contact the reporter on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Matthew Malinowski, Raymond Colitt