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Heavy machinery operates at a construction site near the Port of Rio de Janeiro in this aerial photo taken on Friday, Aug. 22, 2014.

Dado Galdieri/Bloomberg

Brazil's economy slipped into recession for the first time in more than five years as investments contracted on lower confidence before the October presidential election.

Gross domestic product shrank by 0.6 per cent in the April– June period from the previous three months, after contracting a revised 0.2 per cent in the first quarter, the national statistics agency said today in Rio de Janeiro. The contraction in the second quarter was bigger than the median estimate of 42 economists surveyed by Bloomberg, who expected a 0.4 per cent drop.

President Dilma Rousseff has attempted to revive growth with tax cuts, billions of dollars in credit and higher social spending. With inflation hovering around the upper limit of the target range, consumer and business confidence eroded in the run-up to the first round vote on Oct. 5. It's the first time the economy contracted for two consecutive quarters since the aftermath of the global financial crisis in 2008.

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"This is the last thing that Dilma would have wanted, today's data is the worst-case outcome for her," Neil Shearing, chief emerging markets economist at Capital Economics Ltd, said by phone from London. "This is clearly going to put pressure on the central bank to loosen policy in order to support growth."

Swap rates maturing in January 2017 fell seven basis points, or 0.07 percentage point, to 11.19 per cent at 10:03 a.m. local time. The real rose 0.1 per cent to 2.2402 per U.S. dollar.

Investment Drop Investments contracted 5.3 per cent in the second quarter from the previous three months, accounting for the bulk of the contraction in gross domestic product, the national statistics agency said today. Family consumption, still sustained by increases in wages, rose 0.3 per cent.

Shearing cut his 2014 growth forecast to 0.5 per cent from 1.5 per cent after the GDP report.

Finance Minister Guido Mantega said yesterday the economy will grow 3 per cent next year as the government adopts a tighter budget, allowing the central to ease the "severe" monetary policy it implemented to slow inflation.

Jose Francisco de Lima Goncalves, chief economist at Banco Fator SA, said the economy won't grow more than 1 per cent next year.

"It will take time to see an economic recovery," Lima Goncalves said in a phone interview from Sao Paulo. "The infrastructure bottlenecks won't disappear. The consumption cycle is running out."

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Key Rate The central bank on July 16 kept the benchmark interest rate unchanged at 11 per cent for the second straight meeting after lifting the rate by 375 basis points in the year through April. Brazil has the highest benchmark borrowing costs among rate-setting nations in the Group of 20.

Policy makers signaled plans to hold the key rate at the highest level in more than two years as inflation persists above the mid-point of its target even as demand eases.

Rousseff's support fell before the elections, undermined by slower growth, according to two polls released this week.

Former Environment Minister Marina Silva would win 45 per cent of voters' support in an Oct. 26 runoff against Rousseff, who would garner 36 per cent, according to an Ibope poll published on Aug. 26. The survey questioned 2,506 people on Aug. 23-25 and had a margin of error of plus or minus two percentage points.

Silva has 43.7 per cent support in the second round, 5.9 percentage points more than Rousseff in an Aug. 21-24 MDA survey published Aug. 27, which has a margin of error of plus or minus 2.2 percentage points.

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