Brazil faces recession risk after economy shrinks in first quarter

Brazil's economy shrank in the first quarter of the year, official data showed Thursday, taking Latin America's biggest country to the brink of recession for the first time in two years.

Gross domestic product contracted 0.2 percent from the previous quarter, the statistics agency said, marking the first decline in the key indicator of economic activity since the end of 2016.

The figure confirms what many Brazilians already knew -- two years on from a devastating 2015-2016 recession, Brazil's economy is still struggling to recover. It is bad news for far-right President Jair Bolsonaro, who took power in January on a promise to revive the economy, and increases pressure on the central bank to cut interest rates.

Bolsonaro's signature pension overhaul, seen as key to unlocking other much-needed economic reforms and repairing the country's finances, has stalled in Congress.

"The early signs are that growth in the second quarter has been very weak, too, and there is now a real risk that the economy will slip into a technical recession," said William Jackson of London-based Capital Economics.

A technical recession is defined as two consecutive quarters of GDP decline. When compared to the same period a year ago, the economy grew 0.5 percent in the first quarter, which Jackson said was the slowest pace in two years.

The central bank has so far resisted calls to cut its main interest rate, which is already at a historic low of 6.5 percent.

But Austin Rating chief economist Alex Agostini said easing inflationary pressure in May had given the bank room to lower rates.

"It is not a question of exchanging growth for inflation, but rather avoiding a new recession," he said.

The outlook for Brazil's economy is bleak. Market analysts have pared back their full-year growth forecasts for 13 weeks in a row and now expect the economy to grow 1.2 per cent.

That would be only slightly faster than the 1.1 per cent growth recorded in 2017 and 2018.