UPDATE: 7:12 a.m. EST — Brazil’s economy shrank by 3.8 percent in 2015, according to the national statistics agency IBGE Thursday. The figure markets the country's worst performance in 25 years, Reuters reported.
"While we don't think Brazil is on the cusp of a fiscal crisis, the position is fragile," emerging markets economist Edward Glossop at Capital Economics told BBC.
Brazil braced itself to find out the extent of contraction in its economy in 2015 with its national statistics agency due to publish data on gross domestic product for the last three months of 2015 Thursday. The data is widely expected to show a fourth quarter of consecutive contraction in GDP, even as inflation spiraled to about twice the official target for last year.
Latin America's largest economy nosedived in 2015, due to flagging commodity prices, a weakening currency and a slowdown in demand from China, with a poll cited by the Financial Times expecting GDP to shrink by 3.8 percent in the year — the sharpest yearly contraction since 1981. In February, economists polled by Reuters projected GDP to shrink 3.33 percent in 2016.
If the forecasts prove accurate it would make the two-year period Brazil’s deepest recession in a century.
However, Brazil may still have a long way to go before it sees a recovery in sentiment as market expectations have worsened over the past few weeks, with major rating agencies Standard & Poor's and Moody’s downgrading the country’s debt to junk in February, citing a failure to rein in spending and further deterioration of Brazil’s debt ratios.
Meanwhile, the country faced a spiraling inflation of nearly 11 percent on annual basis in January — its highest level in a decade — with analysts expecting overall inflation to peak around the end of the first quarter of 2016.
“The inflation outlook remains very challenging and the authorities are finding it increasingly difficult to control inflation and anchor expectations,” Alberto Ramos at Goldman Sachs told the Financial Times.
On Wednesday, Brazil’s monetary policy committee, Copom, kept the benchmark Selic interest rate steady at 14.25 percent, as expected by analysts, despite the risk of Brazil missing its inflation target for a second year. Policymakers pointed to uncertainties in the global economy and said the recession could ease price pressures without further tightening.
Tied down by a ballooning budget deficit and a paralyzing corruption scandal at state-run oil producer Petroleo Brasileiro SA, President Dilma Rousseff and the central bank have come under pressure from investors and businesses to cut spending and increase taxes amid the recession.
On the other hand, Rousseff, who is battling impeachment proceedings in Congress, is being urged by her allies to ditch austerity in favor of measures to jump-start the economy and boost employment.
Brazil is currently running an overall deficit of more than 10 percent of GDP in 2015 because of its heavy debt burden.
"We expect a more prolonged adjustment process with a slower correction in fiscal policy, as well as another year of steep economic contraction," S&P reportedly said about the former emerging markets-powerhouse in a statement earlier in February.