March 27, 2015 / 12:20 PM / 4 years ago

UPDATE 2-Brazil economy dodges recession in 2014, but trouble ahead

(Adds data, background, analyst quote)

By Silvio Cascione

BRASILIA, March 27 (Reuters) - Brazil’s economy grew a slightly better-than-expected 0.1 percent in 2014, but sliding investment set the stage for what most observers expect will be a painful recession this year.

Last year’s modest expansion, as published by the government statistics agency on Friday, was still the worst performance for Latin America’s largest economy since 2009 and was largely shrugged off by investors focused on rising inflation and unemployment, and President Dilma Rousseff’s political troubles.

“We are in for a very weak 2015,” said Pedro Tuesta, an analyst with consulting firm 4Cast in New York.

Brazil’s meager 2014 growth hanged on government consumption, a symptom of the country’s deepening imbalances.

While the 1.3 percent increase in public sector demand avoided a sharper drop in economic activity, it also boosted public debt, raising eyebrows at ratings agencies that threatened to strip Brazil’s debt of its investment-grade rating.

This year, with Rousseff changing tack and cutting public spending in order to regain investor confidence, Brazil’s economy is set to shrink 0.8 percent, which would be its deepest slump in 25 years, according to market estimates.

“2015 will be tough, with few chances of recovery and a worrisome adjustment of still-unknown scale,” said José Lopes Filho, president of the Brazilian association of distributors of manufacturing goods.

Economists warn investments are set for another steep drop in 2015 as state-run oil company Petroleo Brasileiro SA and several of its contractors grapple with fallout from a massive corruption scandal.

Finance Minister Joaquim Levy, a University of Chicago-trained economist, has reiterated that pushing through austerity measures takes “courage” but will help return Brazil to growth by 2016.

Investments fell 4.4 percent in 2014, ending the year with its sixth quarterly drop in a row. Political uncertainty ahead of the October presidential election and stubbornly high inflation sent business confidence to record lows.

Household consumption, a reliable growth engine during Brazil’s long boom last decade, grew a disappointing 0.9 percent in 2014 after having increased 2.9 percent in the previous year.

Lower commodities prices also contributed to Brazil’s weakness as exports dropped 1.1 percent in 2014.

The economy grew 0.3 percent in the fourth quarter compared with the previous quarter, beating market expectations for a 0.2 percent contraction.

The 2014 gross domestic product numbers were calculated under a new methodology in line with international standards, which complicated forecasting, according to economists. (Additional reporting by Bruno Federowski; Editing by Brian Winter and W Simon)

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