The weak numbers were released on the same day that the International Monetary Fund warned that the world economy was headed for a "Great Recession" bolstering the view that Brazil's central bank will need to aggressively cut interest rates to prevent a prolonged downturn.
On an annual basis, gross domestic product expanded just 1.3% in the fourth quarter from a year earlier which marks a sharp fall from the 6.8% in the third quarter, according to the IBGE statistics agency.
The quarterly contraction does not bode well for this year which begins on a much weaker footing, which means the country's economy this year could end up with zero growth.
"The fact the economy slowed so sharply in the fourth quarter sets the stage for an even steeper slowdown in 2009," said Roberto Padovani, chief economist at WestLB do Brasil.
Industrial output posted its worst-ever yearly plunge in January, sinking 17.2%, the IBGE reported on Friday. Consumer confidence hit an all-time low in February and some companies, in spite of government suggestions, are cutting thousands of jobs to cope with plummeting demand.
Capital spending plummeted 9.8% in the fourth quarter after surging 6.7% in the previous quarter, signaling that companies are wary of investing to increase capacity in the face of so much economic uncertainty. The agricultural sector, a pillar of the Brazilian economy contracted 0.5% in the fourth quarter from the third when it grew 1.5 percent.
Household consumption, which had been driving Brazil's economic boom in recent years, shrank 2% on a quarter-on-quarter basis. The services sector contracted 0.4% from the third quarter, when it expanded 1.4%.
On the positive side, the downturn has helped ease inflation with retailers slashing prices to attract customers.
Most analysts are now expecting Brazil's central bank to slash its benchmark lending rate by 150 basis points on Wednesday following on the release of the GDP contraction data.
For the whole of 2008, the economy grew 5.1% after expanding 5.7% in 2007. The manufacturing sector dragged the economy down in the fourth quarter, with industries like steel producers and automakers all scaling back production as demand dried up. Industrial output slumped 7.4% from the third quarter, its biggest drop since the fourth quarter of 1996.
Mercopress