Brazil GDP Rises in First Quarter After Two-Year Recession -- Update

By Jeffrey T. Lewis Features Dow Jones Newswires

SÃO PAULO -- Brazil's economy has emerged from its worst recession on record, offering President Michel Temer some breathing room as he resists calls for his resignation over corruption allegations.

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Gross domestic product in Latin America's biggest economy expanded a seasonally adjusted 1.0% in the first quarter from the three months ended in December, the Brazilian Institute for Geography and Statistics said Thursday, after contracting for eight consecutive quarters. The economy shrank 0.4% in the first quarter from a year earlier.

Many economists warned that Brazil isn't out of the woods yet because the abundant harvests in the first quarter won't be repeated in the second quarter and because most other parts of the economy are still underperforming.

"This isn't a sign of a vigorous recovery in the making. It's a sign of a bumper harvest and won't support GDP going forward," said Alberto Ramos, an economist at Goldman Sachs in New York.

Brazil has suffered through two years of economic contraction, with GDP shrinking 3.8% in 2015 and 3.6% last year. The long-awaited economic turnaround, even if it fizzles in the second quarter, couldn't come at a better time for Mr. Temer, who recently was accused by a business executive of demanding bribes.

He has denied any wrongdoing.

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Mr. Temer, who stepped in for ousted President Dilma Rousseff last year after her impeachment, has a long agenda of fiscal changes intended to reignite economic growth, including a constitutional amendment to limit government spending that was approved late last year and a proposal to reform the country's insolvent pension system that's still making its way through Congress.

The pension plan, though unpopular with many Brazilians, won the approval of financial markets, and investment money has flowed into the country's stock market this year, helping lift the benchmark Ibovespa stocks index by 14% from the start of the year through May 16.

That was a day before the first report about Mr. Temer's alleged graft was published, and the Ibovespa has since given up much of those gains. The president's problems also could spell trouble for Brazil's incipient economic recovery, Goldman's Mr. Ramos said.

"The outlook for demand has now been colored by the significant increase in political and policy uncertainty," he said.

Almost all the growth in the economy came from the production side, not from demand, with agriculture expanding 13.4% in the quarter, according to the figures from the statistics agency.

Brazil is the world's second-biggest producer of soybeans, after the U.S., and Brazilian farmers have produced a record soybean harvest of more than 110 million metric tons, according to the latest estimate from the country's crop agency. The agency also has forecast a record corn crop.

Rising commodities prices have helped boost the economy as well, by increasing export revenue, while weak domestic demand has stifled imports. Sales abroad increased 4.8% in the quarter, and imports fell 1.8%, the statistics agency said. Industry also has recovered, growing 0.9% in the quarter after contracting in seven of the previous eight quarters.

The outlook for other parts of the economy is still poor. Joblessness hit 13.6% in the three-month period through April, compared with 7.1% in the same period in 2015. Household spending fell 0.1% in the first three months of the year, the statistics agency said Thursday. Business investment declined 1.6%, and government spending shrank 0.6%. Services were stagnant in the quarter.

"Unemployment is high and wages aren't growing, so there's no demand on the horizon" to spur investment. said André Perfeito, an economist at São Paulo-based Gradual Investimentos.

Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com

(END) Dow Jones Newswires

June 01, 2017 10:24 ET (14:24 GMT)