Brazil's economic free fall could bring wider fallout

Economists call it the resource curse. These days, Brazil seems doubly jinxed by the oil riches that once propelled it into the ranks of the world's fastest growing economies.

On Tuesday, a committee of Brazil's lower house of Congress voted to impeach President Dilma Rousseff, whose government is being consumed by a bribery scandal involving the state-owned oil giant Petrobras.

The political chaos comes as falling oil and other commodity prices have cut deeply into Brazil's export-heavy economy. Now, the political upheaval threatens to plunge the country, and its faltering economy, into further chaos.

And as the world's seventh-largest economy, the contraction will hurt global growth as well.

Brazil's economy is shrinking even faster than fellow emerging market Russia, which has been wracked since the second half of 2014 by economic embargoes and plunging oil prices. Its GDP lags far behind the rest of the "BRICs" — the group that is made up of Brazil, Russia, India and China.

Brazil's local currency, the real, rallied on news of the impeachment proceedings, apparently on the belief that a change in government could bring more business-friendly policies and pull the economy from its tailspin. If the Congress decides to oust Rouseff when it votes on Sunday, she would be suspended for up to six months while the Senate determines her fate.

But even if Rousseff is ultimately ousted, her departure would likely bring only more political turmoil, according to David Rees, an economist at Capital Economics.

"A fractured Congress means that any government would struggle to pass the tough reforms that are required to put the economy onto a sustainable growth path," he said in a note Tuesday.

Once the engine of growth in Latin America, Brazil's economic reversal is now damaging the entire region's economy. On Tuesday, the International Monetary Fund said that drag on the region will continue for the next two years, as weak commodity prices and widespread inflation batter the prospects for growth.

The IMF's latest estimate sees the region's recession deepening, with the economy shrinking by half a percent in 2016, the second year of contraction. That forecast sees the region's economy recovering next year, with a 1.5 percent growth rate. But much depends on how the political crisis plays out, the forecasters said.

The recent bump in oil prices has given Brazil's economy some temporary breathing room. But it remains to be seen whether prices of other commodities recover to levels that will help lift it back into growth.

With inflation topping 10 percent — the highest in 13 years — Brazil central bankers have little room to lower interest rates to try to stimulate growth, according to Wells Fargo Securities.

"The Brazilian government cannot count on (export) revenues to jump-start economic activity through expansive fiscal policies," said Eugenio Aleman, senior economist at Wells Fargo. "Meanwhile, monetary policy has become extremely contractionary as the Brazilian central bank continues to fight inflation."