Rio de Janeiro: Latin America’s largest economy shrank more than analysts forecast, as rising unemployment and higher inflation sapped domestic demand, pulling the nation deeper into recession.

Gross domestic product contracted 1.7 per cent in the three months ended in September, after a revised 2.1 per cent drop the previous quarter, the national statistics institute said in Rio de Janeiro. That’s more than the 1.2 per cent estimate from 44 economists surveyed by Bloomberg, and marks the first three- quarter contraction since the institute’s series began in 1996.

A sprawling corruption investigation has caused political gridlock in Brasilia, delaying President Dilma Rousseff’s efforts to pass measures to fortify fiscal accounts and revive confidence. As the budget deficit has swelled, boosting threats of further sovereign downgrades to junk, the government Monday was forced to impose a partial shutdown, freezing discretionary spending. Meanwhile, the central bank has boosted borrowing costs to the highest since 2006, depressing demand and boosting unemployment, while failing to tame double-digit inflation.

“We’re at the bottom of a deep pit and it seems that we’re still digging,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said by phone. “When you look at the numbers just on the domestic demand side, excluding net exports, the way this is going I think pretty soon we have to start labelling this a depression rather than just a recession.”

Swap rates on the contract due in January 2017 rose two basis points, or 0.02 percentage point, at 9:08am local time. The real was little changed at 3.8663.

Brazil’s confidence levels are hovering just above their lowest levels in the past decade. Shoppers’ sentiment plunged as the nationwide jobless rate reached 8.9 per cent in September, more than two percentage points more than the same month last year, and inflation surpassing 10 per cent is eating into real wages. Family spending in the third quarter fell 1.5 per cent.

“The idea that consumers might not have income to service debt in the years to follow I think is what terrifies them,” Barclays Plc economist Bruno Rovai said by phone from New York before the report’s release. “Even if there is a recovery of sentiment, we believe the labour market will continue suffering throughout the next year, and that will hold down household consumption.”

Benchmark Rate

To slow consumer price increases, the central bank has nearly doubled the benchmark since 2013, to 14.25 per cent. That’s prompting companies to hold off on taking new loans as the state development bank also reduces subsidised credit. Investment fell 4 per cent in the third quarter — its ninth straight decline, according to the GDP report.

The investigation of kickbacks at state-run oil producer Petrobras is dimming the outlook for a better business climate and the government’s fiscal accounts. The Nov. 25 arrest of the government’s Senate leader for allegedly seeking to interfere with investigations has put Rousseff’s economic agenda back on the sidelines, according to Andre Cesar, a Brasilia-based political analyst.

With her government struggling to win approval for austerity measures in Congress, Brazil had its sovereign debt rating cut at all three major ratings companies during the third quarter. Moody’s and Fitch Ratings reduced Brazil to the lowest investment grade, while Standard & Poor’s cut Brazil to junk after seven years of investment-grade ranking. S&P cited deterioration of Brazil’s fiscal position, political challenges to shoring up government finances, and economic weakness.

There are two more quarterly contractions in store, followed by three of near stagnation, according to the median estimate of five economists surveyed by Bloomberg. That will lead Brazil’s economy to shrink 3.19 per cent this year and 2.04 per cent in 2016, according to the median estimate of about 100 economists surveyed by the central bank. Growth was expected in both years at the outset of 2015.

“We might be in the position in the first quarter of next year that the worst is behind us,” Barclays’s Rovai said. “But still nothing positive would lie ahead.”