(Adds information about further tax increases, graphic)
By Silvio Cascione and Alonso Soto
SAO PAULO/BRASILIA, May 21 (Reuters) - Economic activity in Brazil tumbled in the first quarter and unemployment climbed to a near four-year high, adding to signals that a looming recession could worsen as President Dilma Rousseff reins in public spending.
The central bank said on Thursday its IBC-Br economic activity index dropped 0.8 percent in the first quarter from the last three months of 2014, after sliding more than expected in March.
The index, a gauge of activity in the farming, industry and services sectors, serves as a proxy for official gross domestic product. Economists expect Brazil’s GDP to shrink 1.2 percent in 2015, the steepest decline in 25 years, according to a central bank poll on Monday.
In a separate report, statistics agency IBGE said Brazil’s unemployment rate climbed to 6.4 percent last month, the highest since May 2011.
The figures highlight the steep downturn of the Brazilian economy that has dragged Rousseff’s popularity to record lows, reduced fiscal revenues and threatened the investment-grade rating of the once high-flying emerging market star.
The end of a decade-long commodities boom partly explains the fall from grace of the mining and agriculture powerhouse that grew an average of 4 percent a year in the last 10 years.
Other Latin American countries are also starting to feel the pinch of the plunge in commodities prices, with Mexico’s economy growing at its slowest pace in over a year in the first quarter.
Dwindling business confidence caused by interventionist policies during Rousseff’s first term, excessive government spending and high inflation have contributed to the sharp slowdown.
Since her re-election in October, left-leaning Rousseff has cut spending and raised taxes to regain investors’ trust despite fears the belt-tightening could deepen the expected recession and further erode her political support.
Brazil is expected to announce a budget freeze of up to 80 billion reais on Friday in order to meet its key fiscal goal this year. Economists also expect the central bank to raise interest rates towards 14 percent in coming months, one of the highest among major economies.
Government officials acknowledge the aggressive fiscal and monetary tightening will take a toll on the economy, but believe it is necessary to jump-start activity next year.
New Finance Minister Joaquim Levy could reveal fresh tax hikes as soon as Friday as he tries to make up for revenue losses from changes in saving measures under debate in Congress. The government is considering removing tax breaks for equities and raising taxes on banks’ profits.
The Brazilian economy will continue to falter in coming months as Rousseff puts an end to years of unchecked spending, said Neil Shearing, chief emerging markets economist with Capital Economics.
“Brazil is paying the price of the loose fiscal polices of the past,” he said. “But is necessary ... this should set a platform for growth in the future.”
Job losses have piled up in recent months as industrial output has crumbled and retailers struggle with falling consumer confidence and high inflation. (link.reuters.com/gac53w)
Wages also dropped. Salaries discounted for inflation fell 0.5 percent from March and slid 2.9 percent from April 2014.
Official first-quarter GDP numbers are scheduled to be released on May 29.
$1 = 3.01 Brazilian reais Writing by Alonso Soto and Silvio Cascione; Editing by Jeffrey Benkoe, Meredith Mazzilli and Anthony Boadle