By Silvio Cascione
BRASILIA, Feb 14 (Reuters) - Economic activity in Brazil fell sharply in December, raising the specter that Latin America's largest economy may have slipped into recession as the government phased out massive economic stimulus to battle inflation.
The Brazilian central bank's IBC-Br economic activity index declined 1.35 percent in December from November in seasonally adjusted terms, more than most economists expected, central bank data released on Friday showed.
The index, a rough reflection for gross domestic product data, rose 2.57 percent in 2013 as a whole but fell for two straight quarters, which characterizes a technical recession. It dropped 0.17 percent in the fourth quarter and fell 0.21 percent in the third quarter.
The central bank index, however, has not proven to be an exact barometer of official GDP data compiled by Brazil's statistics agency IBGE, which provides a broader reading of economic activity.
A recession in Brazil would come as another setback for global emerging economies, with China struggling to rebalance its economy, India dealing with high budget deficits and currencies from Turkey to Argentina tumbling.
"My base scenario has been for stable growth in the fourth quarter, but it is very close now to a technical recession," said Luis Otávio de Souza Leal, chief economist at Banco ABC Brasil in Sao Paulo.
Official GDP data released in December showed a 0.5 percent contraction in the third quarter. Fourth-quarter results will be released on Feb. 27.
Brazil's economy has stalled as the central bank jacked up interest rates to curb inflation, further cooling an already slowing consumer sector. A barrage of tax breaks and credit incentives also did little to support manufacturing output, which continued to struggle with rising costs and poor infrastructure.
A potential recession would be a blow to President Dilma Rousseff, who has scrambled to restore market confidence after a quick deterioration of Brazil's public accounts. She now also faces the prospect of water rationing and soaring energy costs due to unusually hot and dry weather in parts of the country.
Rousseff plans to seek re-election in October.
The numbers could also be a decisive reason for the central bank to slow down the pace of rate hikes in its next policy meeting on Feb 25-26. Brazil's benchmark Selic lending rate is currently at 10.50 percent after six 50-basis points increases since May.
"It will be hard for the central bank to keep raising the Selic rate at the same pace it has been doing if people are discussing whether we are in a recession or not," said Enestor dos Santos, Brazil economist for BBVA in Madrid.
After the release of the IBC-Br data, yields on interest rate futures fell slightly, signalling traders pared bets on a 50 bps increase by the central bank late this month.
A technical recession would likely be short-lived, as economists expect GDP to rebound slightly over the next few quarters. Still, Brazil will likely grow just 1.9 percent this year, a far cry from the break-neck rates of the past decade, according to the median forecast in a weekly central bank poll.
According to Goldman Sachs head of Latin America research, Alberto Ramos, the statistical carry-over for growth in 2014 is now at minus 1.2 percent. "That is, were the economy to stay flat throughout 2014 at the December 2013 level, real GDP would decline by 1.2 percent on average during 2014."
The IBC-Br index, a gauge of activity in the farming, industry and services sectors, rose a non-seasonally adjusted 0.71 percent over the same month a year ago.