New Brazil scandal shatters hopes of stronger rebound: economists

SAO PAULO (Reuters) - Brazil’s political crisis will probably curb a long-awaited economic rebound after doubts over major fiscal reforms weakened the currency and led the central bank to signal a slower pace of interest rate cuts, economists said.

FILE PHOTO: Unemployed people line up in front of a charity house in downtown Sao Paulo, Brazil, March 8, 2016. REUTERS/Paulo Whitaker/File Photo

Analysts started trimming their growth estimates over the past week, after President Michel Temer came under investigation for allegedly taking bribes and condoning hush money for a potential witness in a corruption probe.

The scandal broke as government data showed the economy expanding at the fastest pace in four years, emerging from a deep two-year recession and briefly lifting hopes that Brazil’s economy could float clear of the political crisis.

On Monday, however, economists in a weekly central bank poll trimmed estimates for Brazil’s economic growth in 2017 and 2018 to 0.4 and 2.3 percent respectively, down from 0.5 and 2.4 percent last week.

“The recovery process is going to be slow. It will not have the pace we have been waiting for,” said Júlio Mereb, an economist with the Getúlio Vargas Foundation (FGV).

FGV’s Mereb made a deeper cut to his estimates, forecasting GDP to grow 1.8 percent next year instead of 2.5 percent as he previously forecast.

“All this will cause a lot of damage to the labor market. The job recovery that we had been expecting to start in the middle of this year will be postponed to the second half of next year,” Mereb said. The recent downturn, Brazil’s worst in at least a century, left over 14 million workers unemployed.

Brazil's largest bank Itaú Unibanco SA ITUB4.SA also moderated its bullish economic outlook since the crisis erupted. The bank expects Brazil's GDP to grow 0.3 percent this year and 2.7 percent in 2018, down from 1.0 and 4.0 percent before.

“The political turmoil will delay the fiscal reforms, which complicates the task of balancing the budget,” wrote Itaú Chief Economist Mario Mesquita.

A senior member of Temer’s economic team told Reuters that the administration continues to believe it will pass its reform agenda, which includes unpopular changes to social security and labor rules.

Still, the central bank has suggested the crisis may slow the pace of coming interest rate cuts. While the bank is still expected to reduce its benchmark rate from 10.25 percent to 8.50 percent by year-end, according to the weekly analyst survey, it signaled that its next rate cuts could be smaller than the 100-basis-point reduction last month.

Writing by Silvio Cascione; Editing by Brad Haynes and Lisa Shumaker