The gloom is lifting in parts of Latin America as growth slowly picks up in Mexico and Chile, and Peru regains its footing. But the region's largest economy is facing its worst year in a quarter of a century.
The question in Brazil, once the fast-growing darling of emerging-market investors everywhere, is not whether another recession looms but how deep it will run and how long it will take the stricken economy to climb out of the trough.
Analysts polled by the central bank in its latest weekly survey expect the economy to contract this year by 0.5 per cent, their eighth consecutive reduction after starting the year forecasting minimal growth. This follows a first-half recession and negligible expansion for the full year in 2014.
But this seems optimistic, given the storm clouds hovering over the landscape.
These include the fallout from a widening corruption probe linked to state-controlled oil giant Petrobras, a worsening trucker strike, weak commodity prices, drought-related energy shortages and deepening budgetary woes – the deficit nearly tripled during President Dilma Rousseff's first term. The risk of losing its investment-grade status hangs over the government, which is prompting it to impose austerity cuts.
Moody's Investors Service slashed its rating on Petrobras Tuesday to two notches below investment grade. The cut to junk status "reflects increasing concern about corruption investigations and liquidity pressures," Moody's said in a statement.
Barclays warns that the government's bond rating could suffer a similar fate if it is forced to cover a large capital shortfall at the energy company.
Led by hawkish new Finance Minister Joaquim Levy, an economist schooled at the University of Chicago, Brazil is about to become the latest testing ground for the dwindling number of policy makers who still think bitter austerity medicine is the best way to revive a critically ailing economy.
In Brazil's case, though, they may be right. There is no way the government could continue on its disastrous previous course of unsustainable fiscal spending, price controls and hefty tax breaks designed to spur more consumption. The result was a lousy mix of poor growth, stubborn inflation and falling investor confidence.
Measures being imposed or considered by Mr. Levy (already nicknamed "Scissorhands") include price increases on fuel, energy and transportation, higher taxes on gasoline and financial transactions, and an end to tax breaks on the purchases of new vehicles, appliances and construction materials. He is also looking at reducing retirement and jobless benefits, among other cuts, with the goal of achieving a primary fiscal surplus this year of 1.2 per cent of gross domestic product.
But such fiscal adjustment will require a hefty dose of private investment in an expanding economy. And none of the proposed measures will accomplish that magic trick.
Indeed, the early returns so far are a jump in inflation and an interest rate hike by the central bank, which isn't a good policy prescription in the midst of a recession.
No wonder Barclays' emerging-market specialists reversed their forecast for real GDP this year after a sobering investor trip that included meetings with government, central bank and Petrobras officials, local economists, political analysts and portfolio managers.
Citing risks stemming from possible energy rationing, political uncertainty and the effects of the Petrobras scandal, Barclays now expects the economy to shrink by 1.1 per cent, after previously predicting anemic growth of 0.8 per cent.
"The lack of structural reforms to contain fiscal expenditures will likely increase the tax burden in Brazil, negatively affecting the productive sector's growth conditions in a context of anemic domestic demand, and leading to weak 0.5-per-cent growth in real GDP in 2016," Barclays says in a report.
Mr. Levy may come to miss his old comfortable financial sector job as he wades into this quagmire.