Brazil falls into recession as election looms

Brazil, Latin America's largest economy, has fallen into recession, further weakening President Dilma Rousseff, just weeks before voting in what will be a tough re-election battle.
Brazil's national statistics institute said Friday GDP shrank 0.6 percent in the second quarter and revised an initially  positive first quarter growth estimate down to -0.2 percent.
Coming ahead of October presidential and general elections, the figures will damage already low industrial and consumer confidence in what once was a fast-growing regional powerhouse.
The contraction comes with Rousseff fighting to win re-election, as the latest polls show a major surge in support for ecologist Marina Silva.
Silva, a former environment minister under Rousseff's predecessor Luiz Inacio Lula da Silva, shot to prominence after Socialist candidate Eduardo Campos died a plane crash on August 13.
She had been Campos' running mate and took the reins of his campaign.
- External factors -
Polls this week show her defeating Rousseff in an October 26 run-off, although the latter remains favorite to top first round voting on October 5.
"The data are likely to be seized upon by Dilma Rousseff's challengers to attack her poor record on growth and inflation," said Robert Wood, Brazil analyst for the Economist Intelligence Unit.
"It is unlikely that the government will announce any new measures to breathe life into the economy," he added.
Minister of Finance Guido Mantega insisted external factors were largely behind the poor statistics and forecast a swift return to growth.
"Things have not improved on the international front and that is not helping most countries" Mantega said in Sao Paulo.
"This result was below expectations (but) I believe we should not be talking of recession ... salaries are on the up and the consumer market is expanding," he said.
But Margarida Gutierrez, an economics professor at Rio University, warned 2015 would be tough.
"Brazilian growth has been slowing since 2011 owing to the great uncertainty surrounding economic policy and large degree of state intervention," Gutierrez told AFP.
"This year brings additional uncertainties -- the elections, the risk of electricity rationing and adjustments which will have to be made in 2015," she said.
- World Cup partly to blame -
Analysts have in part blamed the poor second quarter showing on the public holidays which the government granted during the month-long World Cup football extravaganza.
Citizens enjoyed an afternoon off on Brazilian match days and host cities also enjoyed a holiday every time they hosted a game, dampening economic activity.
With most eyes on the football for five weeks, industrial activity dipped 1.5 percent in April-June, the IGBE national statistics agency figures show.
As the country ponders a potential poll win for Silva, second quarter investment fell 5.3 percent.
The Rousseff administration has cut growth forecasts for the year to 1.8 percent, blaming the global crisis.
Market forecasts for 2014 are for GDP to rise just 0.7 percent, for a fourth straight year of sluggish growth after shooting ahead 7.5 percent in 2010.
- Dilma will be affected -
Analyst Andre Perfeito of consultancy Gradual Investments said: "This is very much going to affect Dilma."
But he added: "Brazil is not broke."
In a note to investors, BNP Paribas said: "Some observers may hesitate to characterize Brazil’s current situation as a ‘recession’ on the grounds that Q1 growth was not sufficiently negative.
"Beyond the semantics, though, one thing is clear: Brazil is seeing poor growth and high inflation at the same time."
Economist Caio Megale told the Valor financial daily that "the fall is in large part temporary and linked to the effects of the World Cup -- though part of this slowdown is more structural, owing to higher interest rates (currently 11 percent) and a tail-off in confidence."
Citing a need for "much-needed reforms," Capital Economics warned against a loosening of policy, saying strategies such as cutting reserve requirements or interest rates "would risk doing more harm than good."
Many forecasters and the government predict a return to growth for June-December, prompting Perfeito to conclude: "Brazil is going to continue growing -- it is currently enduring growth pangs."