Brazil's two-year recession ends but political scandal still looms large over President Michel Temer

Jasper Jolly
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Brazil's President Michel Temer is facing political scandal despite economic growth (Source: Getty)

Brazil’s economy rebounded from recession in the first quarter of the year, despite the economic recovery being threatened by a deepening political crisis.

After two years in which Brazil’s economic output shrunk in each successive quarter the economy expanded by one per cent in the first three months of 2017, according to the Brazilian statistics office.

Brazil’s central bank last night lowered its main interest rate again by 100 basis points in an effort to further stimulate the economy. The Selic rate at which it lends to other banks now stands at 10.25 per cent, its lowest since the start of 2014.

Read more: Protectionism and profligacy are destroying Brazil

However, prospects for a continuation of the recovery remain overshadowed by the latest political crisis which has engulfed the administration of President Michel Temer.

Temer was recorded allegedly condoning a plot to pay off key witnesses in a corruption trial, leading to doubts his ruling coalition could continue in power.

The centre-right president was elected after the “Lava Jato”, or car wash corruption scandal led indirectly to the impeachment of his left-wing predecessor, Dilma Rousseff.

The scandal, which has seen scores of politicians across the political divide either found guilty of corruption or put under investigation, threatens Temer's key pension reform plans.

Read more: Brazilian assets dumped after fresh corruption scandal rocks President

“We expect a bumpy road ahead,” said Andres Abadia, senior international economist at Pantheon Macroeconomics. “Our base case is that President Temer will muddle through, but if the crisis deteriorates further, and fiscal progress is postponed, the threat of a renewed downturn is very real.”

The continuing revelations also threaten to further weigh on growth in Brazil, once seen as one of the most promising economies in the world under the “Brics” moniker, which also included Russia, India, China and South Africa.

Read more: Brics foundations are proving to be shaky

However, Brazil’s growth was founded upon commodity wealth, including its massive state-owned oil company, Petroleo Brasileiro, or Petrobras, which was a central source of illicit funds found by corruption probes.

The fall in oil prices since the middle of 2014 left a huge dent in government revenues, but the economy had started to look healthier until the latest revelations.

Dev Ashish, an economist at Societe Generale, said: “The prevailing uncertainty over these cases, the government, and the legislation could continue to deter investors, affecting the prospect of a growth acceleration.”

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