UPDATE 4-Brazil vows stimulus after 2011 GDP disappoints
* Growth slows to 2.7 pct in 2011 from 7.5 pct in 2010 * GDP expands 0.3 pct in Q4 after contraction in Q3 * Agriculture, consumer spending sustain growth * Mantega vows to stimulate economy, protect real By Brian Winter SAO PAULO, March 6 (Reuters) - Brazil's government promised aggressive new stimulus measures after data showed the economy expanded just 2.7 percent in 2011, raising fears that one of the world's most dynamic emerging markets is now slipping into a new era of mediocre growth. The sharp slowdown during President Dilma Rousseff's first year in office saw Brazil underperform its peers among big developing countries as local industries struggled with soaring business costs and an overvalued currency. A rebound in consumer spending and strong agricultural exports only barely allowed Brazil to avoid recession during the second half of the year, the data released on Tuesday showed. Investors bet the weak performance would lead Brazil's central bank to slash interest rates more aggressively, with a cut of at least half a percentage point, and possibly 75 basis points, expected following the bank's meeting on Wednesday. Worries about a slowdown in Brazil and China, two of the biggest growth engines in an otherwise troubled world economy in recent years, contributed to the largest declines in global equities in about three months on Tuesday. Brazil's Bovespa stock index fell 3 percent, while its currency weakened 1.5 percent. Finance Minister Guido Mantega pointed to data showing a modest recovery in the fourth quarter that he said is likely to accelerate throughout 2012, while vowing that the government would offer tax incentives and other unspecified stimulus measures to spur manufacturing and investment in particular. "We are better placed to give stimulus this year," Mantega told reporters in Brasilia. "We will implement all the necessary measures to stimulate the economy." Nonetheless, the data reinforced the biggest concern of Rousseff and many business leaders - that Brazil may be downshifting into a prolonged period of lackluster 3 percent annual growth as a tight labor market, woeful infrastructure and other barriers prevent the economy from expanding any faster. "Things just aren't taking off," said Senator Valdir Raupp, the head of the PMDB party, which is part of Rousseff's coalition. "Investments aren't happening. There are just a few sectors where things are going well." The slowdown has come as a shock for many Brazilians following 7.5 percent growth in 2010. Even when factoring in the global crisis, growth averaged 4.2 percent from 2005 to 2010. "If this year continues at the same rhythm as last year, the (economy) could frustrate us again. Starting now, we're going to have to give it a boost," Raupp said. Yet, stimulus could backfire. Inflation reached a seven-year high of 6.5 percent last year, and while it has slowed in recent months, there may simply not be much room for the government to jolt the economy without risking another bout of price rises. INDUSTRY IS THE BIG PROBLEM Economic activity expanded 0.3 percent in the fourth quarter following a revised 0.1 percent contraction in the previous quarter, government statistics agency IBGE said. The biggest drag on Brazil's economy continues to be industry, which contracted 0.5 percent in the fourth quarter compared with the previous quarter. Manufacturers have blamed most of their problems on Brazil's currency, which has strengthened about 40 percent since the depths of the financial crisis in 2009 and 6 percent this year. "Worse than the GDP result is the proof that Brazil is becoming an uncompetitive country," said Senator José Agripino, from the opposition DEM party. Rousseff has already implemented targeted tax incentives in recent months to try to help sectors such as autos and consumer goods that have struggled. Her government also has raised the ire of some countries and multinational companies by threatening to raise tariffs on auto imports from Mexico, for example. Mantega said the government is still aiming for 4.5 percent growth this year. However, many business leaders and politicians say that the core problems are more related to high taxes and other costs that will necessitate tough economic reforms to fix - something Rousseff has shown little interest in doing. "The time has come for us to prioritize courageous structural reforms that really address the competitive problems of the Brazilian economy," said Paulo Godoy, president of ABDIB, a prominent industry group. "The country needs urgently to reduce the existing barriers to investment." WELL BEHIND REST OF LATIN AMERICA Despite the disappointing result of 2011, the residual glow of recent years means that Brazil still feels in many places like a country enjoying an economic boom. Unemployment remains near record lows, and Rousseff's approval rating remains around 70 percent. Many Brazilians, especially those among the estimated 25 million who have joined the middle class over the past decade, continue to acquire houses, cars and household goods at a pace never seen before. However, that boom is arguably responsible for the problems occurring now. The tight labor market has driven up costs and made it difficult for businesses to see through expansion plans. One high-profile example is the delayed construction of Brazil's stadiums to host the 2014 World Cup, which has prompted a public spat with FIFA officials in the past week. Even a relatively down year was likely enough to push Brazil past Britain to become the world's sixth-largest economy. Gross domestic product totaled $2.48 trillion in 2011, based on the average exchange rate, the government said in a statement. Rafael Bistafa, an economist for Rosenberg & Associados in São Paulo, said the growth in the fourth quarter showed that "the worst is past" and that the stage should be set for a light acceleration throughout 2012. Interest rate futures fell across the board following the data release, but later traded mixed. Rousseff and other officials have in recent days blamed rich countries for Brazil's problems, saying that Europe's efforts to escape its crisis by flooding the globe with cheap money has caused costs to rise in emerging market nations like Brazil. By the standards of its peers, Brazil fared especially poorly last year. Latin American economies are believed to have averaged 4.6 percent growth in 2011, according to data released in January by the International Monetary Fund. Brazil also likely finished in last place among members of the BRICS group of emerging market nations, the IMF projections show. The bloc comprises Brazil, Russia, India, China and South Africa. Brazil may not be able to depend on its usual partners to spur its economy. A less bullish economic outlook for China, Brazil's main trading partner, and the continued threat of a crisis in the euro zone mean that Brazil may have to continue to rely on its own consumers for growth. The economy grew 1.4 percent in the fourth quarter compared to the year-earlier period, IBGE said, in line with expectations of 1.4 percent growth in a Reuters survey.