Aug 28, 8:09 PM EDT

Brazil's GDP plunges 1.9 percent in second quarter, putting nation in technical recession


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RIO DE JANEIRO (AP) -- The bottom seems to have fallen out of Brazil's economy, with the government reporting Friday that the gross domestic product plunged 1.9 percent in the second quarter alone, once again throwing the nation into a technical recession.

It's more bad news for President Dilma Rousseff, who is fighting for her political life. Two-thirds of Brazilians polled say they want to see her impeached because of a massive corruption scandal and what is widely perceived as mishandling of the economy.

The drop was slightly larger than consensus forecasts of private economists published by the Central Bank, and prompted many to take an even gloomier view or prospects for the globe's seventh-largest economy.

"We are nudging down our forecast and now think the economy will contract by 2.5 percent this year," the London-based firm Capital Economics wrote in a Friday research report, noting that previously it forecast a 1 percent drop. "As expected, the driver was a complete collapse in domestic demand ... This is a shocking report."

Like most Latin American nations, Brazil has been hurt by the plunge in commodity prices and the slowdown in China, which has been a big buyer of Brazil's soy, iron ore and other commodities.

However, Brazil's economy depends far less on trade than most nations in the region, with exports and imports making up just 27 percent of GDP according to the World Bank.

Brazil boomed for several years on the back of a middle class that expanded by some 40 million people since 2003. Suddenly flush with easy credit, they went on a sustained spending spree, upon which Brazil's government built its economic model.

That spree started to sputter about three years ago and is now officially dead. Many Brazilians are in debt over their heads and are cutting spending severely. Household spending reported Friday fell 2.1 percent as compared to the previous quarter. Rising inflation, unemployment and tightening personal credit have added to souring consumer confidence.

Rousseff, speaking in northeastern Brazil as she inaugurated a low-income housing project, tried to rally the crowd of mostly impoverished Brazilians.

"I know that we're passing through difficulties. Many of you are scared, you think that we're in an uncertain situation, you feel that inflation is still too high and you fear losing your jobs," she said. "I want to say that my government thinks of two things: In how to increase employment, to guarantee that the country returns to growth, and in how to reduce inflation, because we know that inflation erodes the income of the worker."

Inflation for the 12 months ending in July stood at 9.56 percent, the government reported earlier this month. That's far above the government's ceiling target of 6.5 percent.

On GDP, the government's IBGE bureau said the biggest second-quarter drop took place in the industrial sector, where construction output fell 8.4 percent.

That's largely because the nation's biggest construction and engineering firms have been implicated in a massive kickback scandal at state-run oil company Petrobras. Federal prosecutors allege that the nation's biggest firms paid at least $2 billion in bribes over about a decade to politically appointed Petrobras executives in exchange for grossly inflated building contracts.

Since then, most of the firms in the construction sector have been shut out of credit markets and are cash-starved and unable to complete projects or begin new ones.

Meanwhile, government and private investments dropped 8.1 percent, adding to the cold economic climate.

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Stan Lehman contributed to this report from Sao Paulo.

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