(WSJ) Brazil’s Recession Deepens

(WSJ) GDP shrinks for fifth consecutive quarter.

Brazil’s worst recession in recent history continued into 2016, data showed Wednesday, as rising unemployment and deepening political turmoil dragged the once-dynamic economy into its fifth consecutive quarter of decline.

Gross domestic product shrank 0.3% in the first quarter of 2016 from the previous three months in seasonally adjusted terms, the Brazilian Institute of Geography and Statistics, or IBGE, said. That was better than expected, as the median estimate in a Wall Street Journal survey of eight economists had projected a contraction of 0.9%.

Compared with the first quarter of 2015, GDP contracted 5.4%.

Latin America’s largest economy is struggling mightily to find its footing amid what most economists believe will be its deepest downturn in more than a century.

Output is expected to repeat last year’s 3.8% contraction in 2016. Goldman Sachs estimates that Brazil’s GDP per capita will shrink at least 9% in real terms between 2014 and 2016—more than during the so-called “lost decade” of the 1980s.

“Unfortunately I think the second quarter will be worse,” said Alex Agostini, chief economist at Brazilian credit-ratings firm Austin Rating. He said workers who lost their jobs at the end of last year are only beginning to see their unemployment benefits run out.

That means the dire economy is now being felt even more by regular Brazilians, rather than just businesses. Theunemployment rate shot up to 11.2% between February and April, compared with 9.5% in the previous three-month period, while workers’ average monthly earnings declined, the IBGE said this week.

As a result, consumer spending has become a drag on growth, falling 1.7% in the first quarter from the previous three months, the IBGE said Wednesday.

Helping to offset that decline was a better-than-expected trade balance and a 1.1% bump in government spending.

Neil Shearing, chief emerging-markets economist at Capital Economics in New York, said the latter data may reflect a “last-ditch attempt” by President Dilma Rousseff to rally public support as impeachment proceedings against her gathered steam earlier this year.

Ms. Rousseff was forced to temporarily step down in May to face a trial in the Senate, and her replacement, Vice President Michel Temer, has signaled an intention to narrow Brazil’s gaping budget hole as quickly as possible. Brazil’s public-sector deficit surpassed 10% of GDP in the 12 months through April, its debt levels have risen sharply over the past year and it sovereign credit rating has been cut to junk.

“We will have sacrifices,” Mr. Temer said in a speech Wednesday. “But I am convinced it is possible to reverse the situation, regaining confidence and growth.”

Economists are hoping Mr. Temer’s market-friendly cabinet will allow for a rebound in consumer and business confidence in the short term and a series of badly needed overhauls to Brazil’s pension and tax systems down the road.

But it remains to be seen whether the interim president will maintain the political support he needs to push unpopular austerity measures through Brazil’s fractious Congress. Less than three weeks after he took office in Ms. Rousseff’s stead, two of Mr. Temer’s 24cabinet ministers have stepped down for allegedly conspiring to obstruct a corruption investigation that has implicated the upper echelons of his party, the PMDB.

And even if Mr. Temer’s government does stop the bleeding in Brazil’s public finances, the measures needed to achieve this—spending cuts, tax increases or both—are more likely to dent growth than stimulate it, analysts say.

“With fiscal policy now set to tighten, this prop to the economy will go,” Mr. Shearing said of the unexpected rise in government spending during the first quarter.

Carlos Pedroso, chief economist at Banco de Tokyo in São Paulo, said that if Mr. Temer succeeds in rekindling Brazilians’ confidence in economic policy, the impact of austerity measures could be softened by improvements in consumer and business spending.

Fixed investment, in particular, has been a major drag on growth as companies hunkered down amid Ms. Rousseff’s management of the economy. It tumbled 2.7% in the first quarter from the previous three months, its 10th consecutive decline, according to Wednesday’s data.

Rogério Soares, a gym owner in São Paulo who has had to reduce his payroll and cut expenses since profits started falling in 2014, said that Ms. Rousseff’s ouster has inspired “a dose of optimism.” But he is still cautious.

“I think there had to be a change to re-establish confidence, but in practical terms it’s very early,” Mr. Soares said. “In my case for instance, I’m not going to start investing again and am going to focus on preserving cash. I don’t have the confidence yet.”