October 20, 2016 / 11:47 AM / 2 years ago

UPDATE 1-Brazil economy shrinks at fastest monthly pace in over a year

(Adds data, analyst quote, context)

By Silvio Cascione

BRASILIA, Oct 20 (Reuters) - Economic activity in Brazil fell in August at the fastest pace in more than one year, central bank data showed on Thursday, stoking concern the economy may not soon emerge from a two-year recession.

The IBC-Br index, a gauge of activity in the farming, industry and services sectors, fell 0.91 percent in August compared with the previous month after seasonal adjustments, following a 0.18 percent fall in July.

The data marked the index’s sharpest fall since May 2015. It also came in weaker than the 0.69 percent drop forecast in a Reuters poll.

Activity fell 2.72 percent from August 2015, the central bank said, one day after it cut interest rates from a decade high to bolster economic activity.

“Clearer signs that the current recession is being reversed will probably come only in the fourth quarter of this year. Growth, maybe just in 2017,” Banco Fator chief economist Jose Francisco Goncalves wrote in a note to clients.

While Thursday’s data did not break down economic activity by sector, the official IBGE statistical agency earlier reported a steep drop in retail sales, industrial output and services activity in August.

“We expect the economy to continue to face headwinds from exigent financing conditions, a weak labor market, high levels of household indebtedness, weak external demand, and still-contained consumer and business confidence,” wrote Goldman Sachs analyst Alberto Ramos wrote of the IBC-Br data.

Economists in a global Reuters poll on Tuesday projected Brazil’s economy would only resume growth on a year-on-year basis in the first quarter of 2017.

The central bank, in the statement accompanying Wednesday’s interest rate cut decision, reckoned economic activity had been slightly below expectations in the short run. It said that was probably due to “normal fluctuations at the current stage of the business cycle.”

“Available evidence is consistent with recent stabilization of economic activity and with the possibility of a gradual pick-up in economic activity,” the bank said. (Reporting by Silvio Cascione Editing by W Simon)

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