Crisis around Temer Increases Uncertainty over Brazilian Economy

Latin America's biggest economy has seen eight straight quarters of shrinkage.

Brazil's gross domestic product probably expanded by 1.0 percent in the first quarter from the last three months of 2016, after seasonal adjustments, according to the median forecast of 20 economists surveyed by Reuters.

Corruption allegations against President Michel Temer, which threaten to unseat the center-right politician and derail his economic reform agenda, have tempered investors' bets for a more aggressive monetary easing cycle as inflation drops sharply.

But Temer celebrated: "Brazil has left the recession", he said. Services were flat and while that was an improvement on negative growth, it also signaled a lack of confidence by a public battered by unemployment and continuously falling family consumption.

The IBGE state statistics office said that 14 million people were out of work in April period, or 13.6 percent of the workforce.

Economy analyst Felipe Queiroz says better GDP figures will have "marginal" impact, without signifying a true end to the recession that saw the economy shrink 3.8% in 2015 and 3.6% in 2016.

The monetary policy committee, known as Copom, unanimously chose to slash its Selic rate by one percentage point to 10.25 percent from 11.25 percent. By comparison, unemployment in April a year ago was 11.2 percent, while back in December 2013 only 6.2 percent were unemployed. The political turmoil poured cold water on market bets that the central bank would accelerate the pace of rate cuts in response to a sharp inflation slowdown.

"The Committee judges that the recent increase in the uncertainty regarding the evolution of reforms and adjustments in the economy hampers a more timely reduction of estimates of the structural interest rate, and makes them more uncertain", policy makers wrote in the statement accompanying the decision.

'Political uncertainty generates economic uncertainty, ' said Costa Ferreira, who said the equation arises from the connection between the reforms fostered by the Temer administration, particularly on retirement pensiones and stabilization of the Brazilian economy.

  • Jon Douglas