Brazil's economy shrinks by 0.2%

Brazil's economy shrank in the first quarter of the year as severe droughts held back growth, the country's statistics agency reported.

It contracted by 0.2% compared with the previous three months, the government's statistical agency said.

However, this was not as bad as the 0.5% contraction that economists had expected.

The country, the seventh largest economy in the world, has seen economic growth fall sharply in recent years.

The slowdown is partly a result of low commodity prices, sluggish global growth and low investor confidence.

Higher interest rates and tax increases have also held back consumer spending, an important element of Brazil's economy.

The better-than-expected figure was partly due to a rise in the agricultural sector which saw an increase in coffee prices.

But that was offset by a fall in household consumption of 1.5%, the biggest drop since the credit crunch of 2008.

Brazilians are struggling to pay back debt built up during the boom years, a struggle intensified by higher interest rates.

Analysis: Daniel Gallas, South America business correspondent

If Brazilian authorities are right in their forecast, 2015 will see the country's worst economic contraction since 1990, when the country was still experiencing hyperinflation.

Planning minister Nelson Barbosa predicts a 1.2% drop in the GDP for 2015.

Part of Brazil's current problems are self-inflicted.

After three years of overspending, in an attempt to get the economy growing rapidly, President Dilma Rousseff has now moved towards austerity.

Many sectors that received benefits - such as labour tax breaks - are now facing steeper costs. A weaker Brazilian currency has also contributed to higher inflation, which is predicted to rise above 8% - well beyond the government's 4.5% target.

A new finance minister has a mission to get Brazil's economy growing in 2016 or 2017.

But everyone accepts that 2015 will be a year of relatively high inflation and negative growth.

The government has also reined back spending, and the figures showed a fall of 1.3% in government consumption.

Scandal

A massive corruption scandal at the state oil giant Petrobras has seen the firm cut back on investment to save money, causing thousands of workers to lose their jobs.

Dozens of senior politicians and business leaders are implicated in the Petrobras scandal.

Thousand of workers have felt its impact, with dozens of small firms laying off employees and leaving contracts unfulfilled.

For example, one of Brazil's leading construction companies, Galvao, filed for bankruptcy after Petrobras stopped paying it for services. That meant a major road project Galvao was expected to complete has now been mothballed.

Economists expect Brazil's economy to continue to shrink throughout the year.

Cristian Maggio, head of emerging markets research for TD Securities, said: "The trend is for weaker growth going forward.

"Brazil is getting back into a recession."