UPDATE 3-Brazil economy slows decline on government spending surge

miércoles 1 de junio de 2016 12:36 GYT

(Adds finance ministry saying recession is most intense on record, 8th paragraph)

By Silvio Cascione

BRASILIA, June 1 (Reuters) - Brazil's economy shrank for a fifth straight quarter in early 2016, but the drop was smaller than forecast due to heavier government spending in the months before a vote to impeach President Dilma Rousseff.

Brazil's economy shrank 0.3 percent in the first quarter from the fourth quarter, statistics agency IBGE said on Wednesday. The contraction was smaller than the 0.8 percent drop expected by economists in a Reuters poll and the 1.3 percent decline in the previous quarter.

The smaller drop, however, did not stir economists' hopes for an imminent economic rebound.

Although some analysts noted they could trim their forecasts for this year's contraction, currently seen at near 4 percent, they said the positive surprise was largely a result of unsustainable government expenditures. Public spending grew 1.1 percent in the quarter, the most since 2013.

The lower house of Congress voted in April to impeach Rousseff on charges of breaking budget rules, as the public sector budget deficit surpassed 10 percent of gross domestic product and a vast graft probe targeted key figures in her government.

"The numbers did not change the perception that the economy will drop sharply this year," said José Francisco Gonçalves, chief economist at Banco Fator. "The economy will only stabilize and stop falling between the fourth quarter and the first quarter of next year."

Brazil's two-year-long recession, already the worst for Latin America's largest economy since the 1930s, could become its most severe on record if that scenario holds, according to official data.   Continuación...