Brazil’s Economy Expected to Shrink in 2015, as Joblessness Rises in February

Brazil’s Economy Expected to Shrink in 2015, as Joblessness Rises in February

Central bank sees GDP contracting 0.5% this year, with worsening inflation

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A man sits below a job advertisement while waiting for a job interview in Brasília on March 17. PHOTO: REUTERS

By

JEFFREY T. LEWIS and ROGERIO JELMAYER/WSJ

Updated March 26, 2015 12:34 p.m. ET

SÃO PAULO—Embattled Brazilian President Dilma Rousseff

received more bad news about the economy on Thursday, with one government report showing rising unemployment and another forecasting slower growth and faster inflation.

Brazil’s jobless rate rose to 5.9% in February, the highest in almost two years, according to the country’s statistics agency. Meanwhile, the central bank estimated gross domestic product shrank 0.1% in 2014 and forecast a contraction of 0.5% for this year, while revising its forecast for the 2015 inflation rate upward to 7.9%.

The central bank’s negative view is likely to be reinforced on Friday, when the statistics agency releases the country’s official GDP report for the fourth quarter and full year 2014. Economists expect the statistics agency to report that GDP last year didn’t grow from the previous year.

The numbers come just as Ms. Rousseff is facing resistance from her allies in Brazil’s Congress to her government’s proposals for economic austerity. Finance MinisterJoaquim Levy is working to cut the country’s budget deficit by increasing taxes and cutting spending, measures that could slow the economy even further.

A weakening economy is especially harmful to Ms. Rousseff, as she is also battling a deepening corruption scandal involving the state energy group Petroleos Brasileiros.

“We’re going through an economic adjustment,” said Andre Perfeito, an economist at Gradual Investimentos in São Paulo. “But we’re at the beginning, and it’s going to get worse before it gets better.”

Earlier this week a report showed Brazilian consumer confidence in March was its weakest since this indicator started in 2005.

It hasn’t been all bad news for Ms. Rousseff this week, though. On Monday, ratings company Standard & Poor’s said it left Brazil’s credit rating in investment grade territory, with a stable outlook. There were some concerns S&P might downgrade the country. The company cited Mr. Levy’s economic plan for keeping Brazil’s rating unchanged and said it expects the president and the Congress to continue to support it.

Thursday’s employment report was nonetheless another ominous sign for the president. Economic growth in Brazil has slowed dramatically since expanding 7.6% during 2010. In the years since, the jobless rate had remained near record lows, providing the president with a strong accomplishment to tout and helping her win a second term in a tight election last October.

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Brazil’s President Dilma Rousseff is under heavy political pressure and can ill-afford a weakening economy and rising joblessness.PHOTO: REUTERS

With unemployment now starting to rise—from 5.3% in January and 4.3% in December, Ms. Rousseff could be losing one of her few remaining political advantages.

If the number of people abandoning the job market hadn’t declined in recent quarters, “the unemployment rate would already be much higher,” said Alberto Ramos, an economist atGoldman Sachs in New York.

Meanwhile, the central bank’s report on inflation and the economy, released on Thursday, showed the bank’s view of the economy has darkened considerably. The estimated 2014 GDP contraction of 0.1% was a revision from the previous report, published in December, for growth of 0.2%.

Likewise, the central bank swung from the previous forecast of 0.6% growth in the year through September 2015 to predicting the economy will shrink 0.5% during all of 2015. If the bank’s estimate for 2014 and forecast for 2015 are both correct, it would be the first time in decades the country’s economy contracted in two consecutive years.

We’re going through an economic adjustment … But we’re at the beginning, and it’s going to get worse before it gets better.

—Andre Perfeito, economist at Gradual Investimentos in São Paulo

Central bank President Alexandre Tombinisaid on Tuesday during congressional testimony that the bank saw inflation worsening this year because of increases to prices of goods and services set by the government, such as for gasoline, electricity and transportation and because of the weaker real.

Mr. Tombini also said the outlook for prices next year looked a bit better, and in Thursday’s report, the central bank cut its inflation forecast for 2016 to 4.9% from 5%. The bank’s target range for the rolling 12-month inflation rate is 2.5% to 6.5%, and in mid-March the rate rose to 7.9%.

The central bank has been raising its benchmark interest rate to try to control prices, most recently to 12.75%. The bank’s improving inflation outlook for 2016 could mean that the cycle of rate increases is close to finished, according to Jankiel Santos, economist at BES Investimento in São Paulo.

The central bank’s next monetary-policy committee meeting in April “is likely to bear the last hike of the ongoing tightening cycle,” by a quarter point to 13%, Mr. Santos said.

Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com and Rogerio Jelmayer atrogerio.jelmayer@wsj.com

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