Brazil’s central bank released a key gauge of economic activity today that signaled that it’s likely Brazil fell into recession in the second quarter. The country’s economy activity index, which is a proxy for gross domestic product, fell 0.13% in the second quarter from the first quarter of the year, according to the Banco Central do Brasil. Bank analysts cut their growth forecast for the 2019 year to 0.81%. This data was collected before the latest news of an additional round of U.S. tariffs on Chinese exports and before the central bank cut Brazil’s benchmark Selic interest rate on July 31. Economists say that Brazil has room to cut the Selic benchmark by another 75 to 100 basis points by the end of 2019. On July 31 the bank cut its benchmark rate by 50 basis points to 5.5%. That’s the lowest benchmark rate ever. There is one major obstacles standing in the way of the central bank’s path to a 5% benchmark–the real. Every cut in interest rates threatens to weaken the Brazilian real, which makes it harder for Brazilian companies to pay interest on dollar denominated debt and raises the price of imported goods–and the price of commodities such as oil traded in dollars–for Brazilian consumers. The real has tumbled 2.7% since the July 31 interest rate cut.
The news from Brazil follows on similarly negative news on economic growth from the Europe. Industrial production in France dropped 2.3% month over month in June. This comes after news that the purchasing managers’ index in Germany for the manufacturing sector fell to 46.4 in July, a 79-month low. (In this index anything below 50 indicates economic contraction.) The German index result is an especially useful indicator for global economic growth and global trade growth because of the export-orientation of the German economy.
