UPDATE 3-Brazil picks up growth pace in second qtr but easing seen
* Brazil Q2 GDP grows 1.5 pct, above estimates
* Economists see rate hikes, slower growth to come
* Finance minister says confidence to improve
By Silvio Cascione and Asher Levine
SAO PAULO, Aug 30 (Reuters) - Brazil's economy grew at its fastest in more than three years in the second quarter, breaking a long streak of weak results, but rising interest rates and other problems mean the respite will likely be short-lived.
Economists said the good performance was probably a brief rebound after President Dilma Rousseff spurred investment with a slew of stimulus measures. Many expect little to no growth in the second half of the year.
Brazil's gross domestic product grew 1.5 percent from the first quarter, statistics agency IBGE said on Friday. Economists had forecast 0.9 percent growth.
The pick-up, more than doubling the pace of growth recorded in the first three months of the year, contrasts with slower second-quarter growth in emerging market peers such as India and China, while Mexico's economy contracted.
The upbeat numbers were welcome news for the left-leaning Rousseff, who has been heavily criticized by investors for some of her economic policies and whose popularity tumbled following a wave of massive street protests in June.
"I hope this result helps restore confidence as it shows that the Brazilian economy is efficient, dynamic, and is able to grow even in adverse conditions, when growth in most countries is slowing down," Finance Minister Guido Mantega said.
Only China outperformed Brazil in the last quarter among the world's main economies, Mantega said.
A senior source on Rousseff's economic team told Reuters the stronger growth "doesn't change much" in terms of monetary policy, suggesting the central bank will probably keep raising interest rates to keep inflation expectations under control.
Yields on interest rate futures rose after the data as traders bet on a longer monetary tightening cycle. The real strenghtened nearly 1 percent initially, but reversed gains later.
AS GOOD AS IT GETS
With Brazil's economy stuck in low gear since Rousseff took office in 2011, her government offered tens of billions of dollars in stimulus measures such as tax breaks, subsidized credit lines and erected barriers to cheap manufactured imports.
The central bank also kept interest rates at record lows for nearly a year until starting a tightening cycle in April which has brought benchmark credit costs to their current 9 percent.
Investments, as measured by gross capital expenditure, rose for a third straight quarter, gaining 3.6 percent from the previous one. Industrial output expanded 2.0 percent, and agriculture 3.9 percent -- one of the most positive surprises.
While the stimulus measures helped support manufacturers and local exporters, many of the steps taken by Rousseff have also fueled inflation and hurt Brazil's public accounts, leaving limited capacity to sustain economic growth for a long time without broader reforms, economists say.
"It was better than we expected, but the positive surprise was concentrated in the agricultural sector. It doesn't change the outlook for the economy," said Gustavo Mendonca, an economist at Saga Capital in Rio de Janeiro.
"Industry is lagging, we are seeing a slowdown in retail and the impact of the protests, inflation is high, higher interest rates are beginning to have an effect, and data on credit is showing weakness. People may revise their forecasts up for the year, but not by much."
Former central bank director Luiz Fernando Figueiredo, partner at asset management firm Maua Investimentos, said Brazil's economy could even shrink in the third quarter. He cut his forecast for third-quarter growth to minus 0.4 percent from 0.1 percent previously, seeing the latest improvement as a "statistical effect".
The senior source in Rousseff's economic team agreed growth would "pause" in the third quarter, but said it would likely accelerate again by the end of the year.
Even if Brazil's economy posts zero growth in the second half of the year, its surprising performance between April and June should ensure an annual growth above 2 percent in 2013, more than doubling the previous year's mediocre pace.
It also makes it very likely that Brazil will outperform Mexico this year, despite market optimism over economic reforms in Latin America's second largest economy. Mexico's GDP shrank 0.7 percent between April and June and is likely to grow by just 1.8 percent this year, the government said.
Brazil's economy grew 3.3 percent in the second quarter when compared to the year-earlier period, IBGE said. That was above expectations for growth of 2.5 percent in the Reuters poll.
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