Brazil’s worst-ever recession intensified unexpectedly in the final quarter of 2016, data showed on Tuesday, frustrating hopes for signs of a recovery and stepping up pressure on President Michel Temer and the central bank to do more to promote growth.

Brazil’s gross domestic product contracted by 3.6 percent last year, statistics agency IBGE said, following a 3.8 percent drop in 2015. The nation’s two-year downturn is the longest and deepest on record for Latin America’s biggest nation.

The economic contraction worsened in the fourth quarter, with a steeper-than-expected decline of 0.9 percent, following a 0.7 percent drop in the previous three months.

Investment tumbled 10.2 percent in 2016, in a sharp drop that is partly blamed by economists on Brazil’s chronically high interest rates.

The central bank started to cut its benchmark rate from a decade-high of 14.25 percent in October and is expected to take it to single digits this year.

The disappointing data fueled calls for the central bank to accelerate the pace of rate cuts, currently running at 75 basis points per meeting. Yields on rate futures showed an increasing chance of a steeper cut when the bank makes its next scheduled policy decision in April, according to traders.

“There’s a lot of idle capacity in the economy and that’s a reason for the central bank to move faster,” said Cristiano Oliveira, chief economist at  Sao Paulo-based Banco Fibra, responding to Tuesday’s data.

Slow growth rate expected

The majority view among economists is that Brazil will emerge from recession in 2017, but at a very slow growth rate of 0.5 percent, which would be insufficient to reduce unemployment.

The government has forecast growth of 1 percent.

Some economists tempered their views even further following the dismal performance in 2016.

“We see zero growth in 2017, or maybe just a little bit above that,” said Carlos Kawall, chief economist at Banco Safra, in Sao Paulo. “We should not see any big recovery this year; we will have to wait until 2018.”

Green shoots sprouting slowly

Finance Minister Henrique Meirelles rebuked that pessimism by saying after the figures were announced that Brazil is “clearly” starting to grow again, based on indicators ranging from cardboard and motorcycle production to supermarket sales.

A revised forecast for economic growth in 2017 will be announced by March 22, Meirelles said, taking into account the worse-than-expected fourth-quarter data.

Betting that investors’ growing confidence in Brazil would hold, the government reopened on Tuesday a 10-year global bond seeking to raise at least $500 million.

Signs of an imminent recovery include a rebound in vehicle traffic, which appears to have hit bottom in the fourth quarter, according to a senior executive at CCR SA, the country’s biggest toll road operator.

Car output also jumped nearly 15 percent in February, according to the national automakers’ association Anfavea, and farmers hope to harvest a record soy crop this year.

None of that, however, is likely to make for anything more than a shallow and underwhelming recovery, according to Goldman Sachs economist Alberto Ramos.

“A very weak labor market backdrop and still high levels of household and corporate indebtedness should limit the strength of the recovery,” Ramos said.

Tax hikes not ruled out

The downturn has left nearly 13 million people unemployed, caused a record number of bankruptcy filings and led agencies to strip Brazil of its hard-won investment grade credit rating.

It also contributed to the impeachment of former President Dilma Rousseff last year and to the low approval ratings of her successor, President Temer, whose agenda of budget and pension reforms has helped fuel a strong rally in Brazilian equities and currency since last year.

If the economy continues to disappoint, tax revenues could fall short of expectations, putting the country’s budget target at risk. Meirelles said the government could raise taxes or cut spending further if necessary to achieve its 143.1 billion reais ($45.87 billion) primary deficit goal.

Although this recession has been the deepest in Brazil’s history, it has not been marked by the financial upheaval seen in other crises in the country’s turbulent economic past.

Previous downturns were often accompanied by sovereign debt crises, capital flight and hyperinflation, none of which happened during the current slump.
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