| SAO PAULO
SAO PAULO Brazil's economy probably expanded in the third quarter at its fastest pace in more than two years as tax reductions helped boost consumption and revive flagging industry, according to a Reuters poll of economists.
Investment probably shrank for the fifth quarter in a row, however, fueling concerns that the current expansion may be short-lived and overly dependent on government incentives.
According to the median estimate of 42 economists surveyed by Reuters, Brazil's gross domestic product expanded 1.2 percent in the third quarter from the previous one on a seasonally adjusted basis, up from growth of 0.4 percent in the second quarter.
The third-quarter expansion remains well below last decade's torrid growth rates, but it is the fastest since the 1.3 percent rise in the second quarter of 2010.
From the year-earlier period, Brazil's GDP probably increased 1.9 percent, up from a rate of 0.5 percent in the second quarter, according to the median of 40 estimates.
"The worst is clearly behind us," said Marcelo Carvalho, head of Latin America economic research at BNP Paribas in Sao Paulo.
The official data will be published on Friday at 9 a.m. local time (1100 GMT).
Brazil was one of the world's fastest-growing economies just two years ago, but nearly dipped into recession in late 2011 and lagged behind most of its neighbors this year as the global economic slowdown hit local manufacturers.
Intent on maintaining sky-high approval ratings, President Dilma Rousseff raised trade barriers, cut various taxes and took steps to depreciate the country's currency, the real. The central bank also slashed the benchmark interest rate 10 straight times to a record low of 7.25 percent.
The measures, which included a sharp tax reduction on cars and home appliances, supported retail sales and helped industrial output improve.
After contracting 1.7 percent in the second quarter, the industrial sector, Brazil's weakest spot, may have grown by 1 percent in the third quarter, Credit Suisse and Votorantim analysts estimated in separate research reports.
That may help Brazil grow faster next year, according to the poll.
The median forecast in the survey projects that Brazil will show an expansion of 3.9 percent in 2013. That would be up from an estimated 1.5 percent growth in 2012, the slowest pace since a mild contraction caused by the financial crisis in 2009.
Analysts remain cautious, however, underlining the continued fall in investments. Many economists surveyed by Reuters see a fifth drop in a row for the third quarter, with Santander expecting a decline as large as 2.4 percent.
"The only light at the end of this tunnel is the recent pickup in industrial confidence, though it remains below trend," RBS economist Flavia Cattan-Naslausky wrote in a report.
Many investors have linked the recent low investment rates to increased government intervention in a wide range of sectors, from banks to power generation.
Shares of state-led electricity holding company Eletrobras (ELET6.SA), for example, have fallen more than 50 percent in the current quarter after Rousseff announced a plan to offer early renewal of hydroelectric dam concessions in exchange for cuts in power rates of 20 percent or more.
Mounting inflation risks also mean that the government may find less room to stimulate the economy next year. The median forecast in a Reuters poll last week indicated rates would remain stable through 2013, but nearly half of the economists still expected at least one interest rate hike next year.
Forecasts for the quarterly growth rate ranged from 1.0 percent to 1.5 percent, while estimates for the year-over-year rate varied from 1.5 percent to 2.2 percent.
Earlier this month, a central bank proxy for growth showed economic activity had expanded 1.15 percent in the third quarter from the previous one.
(Editing by Lisa Von Ahn)