Brazil slips in to recession

Brazil's economy suffered a technical recession in the first half of this year, with two consecutive quarters of contraction, dealing a blow to President Dilma Rousseff's bid for re-election in October.

Gross domestic product declined 0.6 per cent in the second quarter, when Brazil hosted the start of the 2014 soccer World Cup, compared to the previous three months, while the first quarter was revised down from positive 0.2 per cent to negative 0.2 per cent, Brazil's national statistic agency, the IBGE, said.

Brazil's benchmark equity index, the Bovespa, rose 0.59 per cent in early trade on hopes the poor performance would lead to a change of government.

"We believe that this contraction is largely a temporary effect caused by the reduction of business days during the World Cup," Itau-Unibanco said in a research report. "However, the data already available for the third quarter show weaker-than-expected recovery."

Brazil's economy has been flirting with recession for some time after a series of quarters in which growth has been stagnant, inflation near the top of the central bank's target range and investment and consumer sentiment weak.

Ms Rousseff and her centre-left Workers' Party are still the favourites to win the election but they face an increasing challenge from Marina Silva, an environmentalist who is emerging as a strong rival, and Aecio Neves, leader of the opposition PSDB party that is seen as more pro-business.

The ruling coalition has been able to maintain its popularity thanks to Brazil's still low jobless rate with businesses reluctant to lay off skilled workers and more young Brazilians studying rather than joining the ranks of the unemployed.

But her government is unpopular with investors, who accuse it of meddling with energy and fuel prices, ad hoc intervention in the financial sector and for implementing arbitrary tax cuts in industry.

She has tried to encourage investment by selling concessions to run major airports and highways to the private sector but critics accuse her of doing too little too late to steer the economy away from a model overly dependent on consumption and credit growth.

The contraction in the second quarter was larger than the 0.4 per cent drop predicted by a survey of economists conducted by Bloomberg.

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Agriculture was one brighter spot, expanding 0.2 per cent, and private consumption 0.3 per cent.

GDP growth in the second quarter compared with the same period a year earlier contracted 0.9 per cent but on a 12 months rolling basis grew 1.4 per cent.

The figures are leading economists to downgrade their forecasts for the full year.

Neil Shearing, of London-based research firm Capital Economics, said in a research note that he was lowering his expectations for 2014 economic growth for Brazil from 1.5 per cent to 0.2 per cent.

He said further monetary policy stimulus measures to try to revive growth "would do more harm than good" because credit was already growing at a rate well above nominal GDP and could threaten financial stability.

"What today's data show more than anything else, however, is that wholesale reforms are now critical to restoring economic vigour," he said.

He added it remained unclear which candidate in the election would be able to deliver on the needed changes.

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