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.