Marcela Ayres, Camila Moreira

BRASILIA (Reuters – Brazil’s economy shrank slightly over the past three months, data from government showed Thursday. The recession was caused by a surge in inflation and severe drought in Latin America.

Official statistics agency IBGE reported that Brazil’s third-quarter gross domestic product fell 0.1%. This was lower than the median prediction of zero growth from Reuters.

Brazil’s economy has been struggling since the COVID-19 pandemic. Inflation has reached double-digits and forced the central bank into aggressively increasing borrowing costs.

As President Jair Bolsonaro prepares for his 2022 election, the economic downturns have affected his popularity.

The revised data revealed a 0.4% decline in second-quarter sales, which was worse than the previous 0.1% drop. The definition of recession includes two straight quarters with contraction.

Brazil’s key crops, such as coffee and corn, were also hit by unusually dry weather. The price shocks are caused by diminished hydropower reserves, which pushed up electricity prices.

The third quarter saw a 8.0% drop in agricultural production, and an increase of 1.1% for services.

Capital Economics chief emerging markets economist William Jackson told clients that with financial conditions being tightened and inflation at high levels for the past several years, it is possible for services to decline.

Jackson stated that the weak economic data could cause the central bank not to increase the rate of interest rates at its next policy meeting. Jackson suggested Jackson did this in order to avoid a bigger increase than some predicted.

Economists warn of an even deeper recession next year.

Market expectations for economic growth in 2022 have dropped from 2.3% to 0.6%, according to the central bank’s latest poll of economists. It was released Monday.

Brazil’s Economy Ministry quarrelled with that assertion in a statement issued on Thursday. The ministry reiterated its projection of growth exceeding 2% next year, and highlighted recent employment data as proof of the country’s resilient recovery.

Brazil’s unemployment rate has fallen to 12.6%, down from 14.2% during the preceding quarter.

Brazil’s economy increased 4.0% in the third quarter of 2020 compared to the previous quarter, according IBGE data. That is lower than the median estimate of 4.2%.