Brazil bets on stronger recovery in second half

Mon May 6, 2013 2:29pm EDT

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* Economy has continued to disappoint in Brazil

* Infrastructure concessions to bolster confidence

* Some analysts cast doubts on strength of recovery

By Alonso Soto and Luciana Otoni

BRASILIA, May 6 (Reuters) - The Brazilian government is betting the economy will shift into higher gear in the second half of the year as business confidence improves and stimulus measures take hold, a senior member of the administration told Reuters.

The recovery of Latin America's largest economy remains uneven with investment slowly rising and industrial output still patchy, fueling expectations of a third straight year of lackluster economic growth.

However, Brazil's economy should be firmly back on track by July, when the government hopes a new round of auctions of concessions for airports and roads will attract a wave of investment, the senior member of the administration's economic team said.

"That will change the mood, it will help turn around this climate of mistrust," the official, who asked to remain anonymous in order to be able to speak frankly about the government's views, said in a recent interview, adding: "We can grow more."

Factor in expectations for a pick-up in industrial output and 70 billion reais ($34.72 billion) worth of tax breaks and you have the recipe for success, the official added.

Government officials and private economists agree this year will be better than 2012 when the economy grew a weaker-than-expected 0.9 percent, its worst performance since a contraction in 2009 in the wake of the global financial crisis.

However, the intensity of that recovery has been disappointing, leading many private economists to trim their growth forecasts.

Expectations for a 3 percent economic expansion this year - still below the 4 percent average of the last decade - are starting to look optimistic.

Finance Minister Guido Mantega, whose rosy economic forecasts in years past drew criticism after they failed to pan out, has been more cautious this year. Instead of pinpointing a forecast, Mantega has said the economy could grow between 3 and 4 percent this year.

Stronger growth is a top priority of President Dilma Rousseff's administration, which has given billions of dollars in tax breaks and cheap loans to struggling industries. Under Rousseff, the central bank has also slashed interest rates to record lows to boost consumption, though it raised rates last month to rein in rising prices.

All that stimulus, however, has yet to secure a stronger recovery for an economy that has suffered from years of anemic investment and declining productivity.

"The government's arguments for a stronger recovery ahead are not bad, but they continue to be just good-hearted bets," said Samuel Pessoa, an economist with the Getulio Vargas Foundation and a partner at investment consultancy Reliance.

"I still don't see signs of a more solid recovery."

Pessoa, who was an advisor to an opposition senator in the past, said he sees the economy growing 2.7 percent this year.

ECONOMY KEY TO 2014 ELECTION

Another year of disappointing growth could hurt Rousseff's chances for re-election next year.

Although the career technocrat remains immensely popular at a time when unemployment hovers near record lows, some of her political opponents are starting to loudly criticize her handling of the economy and inflation.

All that noise has made the job of the economic team more difficult, the official said.

Annual inflation climbed to 6.59 percent in March, piercing the ceiling of the official target range of 4.5 percent plus or minus two percentage points for the first time in over a year. However, inflation is expected to ease slightly to 6.41 percent in April, according to the median forecast of 25 economists surveyed by Reuters.

A steady drumbeat of media coverage of high inflation and weak growth is complicating efforts to anchor price expectations and bolster business confidence, the source said.

"We need to be much more careful," said the official. "We don't want all the political noise to hurt the recovery."

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