UPDATE 2-Brazil industrial output gives up most of January's gains
* Industrial output falls 2.5 pct from January * Nearly erases previous month's gains * Capital goods output slowly recovering By Asher Levine SAO PAULO, April 2 (Reuters) - Brazilian industrial output shrank more than expected in February, reversing most of the previous month's gains and casting fresh doubt over the health of a meager recovery in the struggling sector. Industrial production fell a seasonally adjusted 2.5 percent in February from January, more than the 2.05 percent drop forecast in a Reuters poll, government statistics agency IBGE said on Tuesday. "(The data) came in bad, but it wasn't that much of a surprise...the industrial recovery remains quite fragile," said Daniel Cunha, an economist with XP Investimentos in Rio de Janeiro. "The good news is that it showed a more favorable trend for capital goods." The data also reinforced bets that Brazil's central bank would not raise interest rates at its next policy meeting in April despite quickening inflation, for fear of putting the economy's fragile recovery at risk. Yields on interest rate futures dropped in early trading on Tuesday, with the yield on contracts maturing in January 2014 , the most traded in the session, down 4 basis points to 7.74 percent. Production of capital goods rose for the second straight month, adding 1.6 percent in February from January. Capital goods production had suffered in the previous year as a lack of business confidence led companies to hold off on making investments. Brazil's economic growth has been limited by its manufacturing sector in recent years, as industry struggles with infrastructure bottlenecks, chronically low levels of investment and rising labor costs. February's industrial production shrank 3.2 percent over the same month a year ago, greater than the 2.4 percent decline forecast in the survey. President Dilma Rousseff's government has attempted to revive the sector with stimulus measures, trade barriers and tax breaks. After a 2.7 percent contraction in 2012, economists expect industrial output to grow 3.12 percent this year, according to the median forecast in a central bank poll. Industrial production had risen more than expected in January, bolstered by surging capital goods output as government stimulus boosted sales of heavy trucks. IBGE revised January's data on Tuesday to show a 2.6 percent rise from December, up from a previously reported 2.5 percent. Analysts said those gains were mostly a one-off occurrence, and that February's numbers better reflected the challenges still facing Brazilian industry as the effects of stimulus wear off. "The data erased nearly everything we gained in January, but those gains were mostly seasonal, with the refilling of stocks after the holidays, and the effects of the government stimulus on autos," said Mariana Hauer, an economist with Banco ABC Brasil in Sao Paulo. "I don't think we're seeing a recovery yet. The data shows we are still very stagnated and the drop was very disseminated across the sectors." Of the 27 industrial sectors surveyed by IBGE, 15 shrank in February from January, including automobile production, pharmaceuticals, foods and paper products. In broader industrial categories, durable consumer goods fell 6.8 percent, while intermediate goods dropped 1.3 percent. (pct change) Feb/Jan Feb/Feb12 Capital goods 1.6 9.1 Intermediate goods -1.3 -4.4 Consumer goods -4.2 -5.0 Durable consumer goods -6.8 -2.2 Semi-durable and -2.1 -5.8 non-durable consumer goods Industrial output -2.5 -3.2
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