Brazil GDP falls most since 2015 as COVID-19 hits family budgets

BRASILIA (Reuters) - Brazil’s economy contracted in the first quarter by the most in nearly five years, data showed on Friday, as the coronavirus outbreak slammed the brakes on a fragile recovery and pushed the country toward what looks like a deep recession.

People walk on Barra da Tijuca beach during the coronavirus disease (COVID-19) outbreak in Rio de Janeiro, Brazil, May 27, 2020. REUTERS/Ricardo Moraes

The pandemic triggered a 1.5% drop in gross domestic product (GDP) from the prior quarter, government statistics agency IBGE said, cutting activity in Latin America’s largest economy back to the same level as 2012.

The economic fallout has been far worse in the second quarter, as the outbreak and public quarantine measures only gained steam in the second half of March.

The main driver of the first-quarter slump was a 2% fall in household consumption, which accounts for around two thirds of demand. It was the biggest decline since 2001.

“The fall in household consumption was startling. In the last few years GDP has been weak but household consumption was always a strong point. This was a drastic change,” said Rafaela Vitoria, chief economist at Banco Inter in Belo Horizonte.

Brazil’s Economy Ministry said the figures were heavily skewed by social distancing and lockdown measures imposed in the last two weeks of March. In a statement, the ministry reiterated that a return to fiscal discipline and its pro-market reform agenda are crucial to fostering a “rapid recovery.”

Figures from the central bank on Friday showed that Brazil’s national debt and public sector deficit hit record highs in April due to a surge in government spending to cushion the economic hit from the pandemic.

Related Coverage

The 1.5% GDP contraction in the January-March period, in line with the median estimate in the Reuters poll, was the biggest quarterly drop since the second quarter of 2015, when Brazil was in the midst of one of its deepest recessions ever.

Activity across the services sector fell 1.6% in the quarter, while industrial output fell 1.4% and net trade was a drag on growth, IBGE said. On the other side, agriculture, government spending and fixed business investment all rose.

With GDP seen falling a record 12.7% in the second quarter in annual terms, according to the Reuters consensus, Brazil is heading for a record annual drop of more than 6% and one of its worst recessions ever.

Economists at Goldman Sachs trimmed their 2020 GDP forecast to -7.7% from -7.4% following the first quarter figures.

That is likely to pile pressure on President Jair Bolsonaro, whose popularity has suffered from his handling of the exploding COVID-19 outbreak in Brazil, second only to the United States with nearly 440,000 confirmed cases.

The prospect of the steepest economic downturn on record and inflation falling to the lowest level since the ‘Real Plan’ was launched in 1994 has prompted the central bank to cut interest rates to an all-time low of 3.0%, with the pledge to cut again significantly in June if appropriate.

The government has also rolled out a range of emergency fiscal measures to support workers, jobs and businesses, which it says will cost almost 350 billion reais ($66 billion).

Reporting by Jamie McGeever; Editing by Brad Haynes and Nick Zieminski