(Corrects 2013 IBC-Br growth rate to 2.57 pct, not 2.37 pct)
By Silvio Cascione
BRASILIA Feb 14 Economic activity in Brazil
fell sharply in December, raising the specter that Latin
America's largest economy may have slipped into recession as the
government phased out massive economic stimulus to battle
The Brazilian central bank's IBC-Br economic activity index
declined 1.35 percent in December from November in
seasonally adjusted terms, more than most economists expected,
central bank data released on Friday showed.
The index, a rough reflection for gross domestic product
data, rose 2.57 percent in 2013 as a whole but fell for two
straight quarters, which characterizes a technical recession. It
dropped 0.17 percent in the fourth quarter and fell 0.21 percent
in the third quarter.
The central bank index, however, has not proven to be an
exact barometer of official GDP data compiled by Brazil's
statistics agency IBGE, which provides a broader reading of
"My base scenario has been for stable growth in the fourth
quarter, but it is very close now to a technical recession,"
said Luis Otávio de Souza Leal, chief economist at Banco ABC
Brasil in Sao Paulo.
Official GDP data released in December showed a
0.5 percent contraction in the third quarter. Fourth-quarter
results will be released on Feb. 27.
Brazil's economy has stalled as the central bank jacked up
interest rates to curb inflation, further cooling an already
slowing consumer sector. A barrage of tax breaks and credit
incentives also did little to support manufacturing output,
which continued to struggle with rising costs and poor
A potential recession would be a blow to President Dilma
Rousseff, who has scrambled to restore market confidence after a
quick deterioration of Brazil's public accounts. She now also
faces the prospect of water rationing and soaring energy costs
due to unusually hot and dry weather in parts of the country.
Rousseff plans to seek re-election in October.
The numbers could also be a decisive reason for the central
bank to slow down the pace of rate hikes in its next policy
meeting on Feb 25-26. Brazil's benchmark Selic lending rate
is currently at 10.50 percent after six 50-basis
points increases since May.
"It will be hard for the central bank to keep raising the
Selic rate at the same pace it has been doing if people are
discussing whether we are in a recession or not," said Enestor
dos Santos, Brazil economist for BBVA in Madrid.
After the release of the IBC-bR data, yields on interest
rate futures <0#2DIJ:> fell slightly, signalling traders pared
bets on a 50 bps increase by the central bank late this month.
A technical recession would likely be short-lived, as
economists expect GDP to rebound slightly over the next few
quarters. Still, Brazil will likely grow just 1.9 percent this
year, a far cry from the break-neck rates of the past decade,
according to the median forecast in a weekly central bank poll.
The IBC-Br index, a gauge of activity in the farming,
industry and services sectors, rose a non-seasonally adjusted
0.71 percent over the same month a year ago.
(Editing by Todd Benson and W Simon)