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Markets News

UPDATE 2-Brazil's economy surges on investment, industry

* Brazil Q1 GDP grows 2.7 pct from Q4 vs 2.5 pct forecast

* Economy expands 9 percent from year-ago period

* Analysts see growth cooling but remaining robust (Recasts, adds comments, market reactions)

SAO PAULO, June 8 (Reuters) - Brazil’s booming economy grew at its fastest clip in at least 14 years in the first quarter, beating expectations and signaling robust growth for 2010 in contrast to the struggling European and U.S. economies.

Brazil's economy, Latin America's largest and the world's eighth-biggest, grew a whopping 9 percent in the first quarter BRGDPY=ECI compared with a year earlier, the swiftest pace since at least 1996, the government said on Tuesday.

It had been expected to rise 8.4 percent, according to the median forecast of 18 analysts polled by Reuters. Estimates for year-on-year growth ranged from 6 percent to 9.2 percent.

Compared to the fourth quarter of last year, Brazil's economy grew 2.7 percent in the first quarter BRGDP=ECI, beating a median forecast of 2.5 percent. That was the fastest pace since the first quarter of 2004, pulled up by robust capital spending and industrial growth.

The torrid growth, which has fueled concerns of overheating, is expected to cool in the coming months as higher interest rates and the withdrawal of government tax breaks take effect. But analysts said Tuesday’s figure suggested growth would remain healthy for the rest of the year and ahead of October’s presidential election.

“These figures are confirmation of what the market was talking about, a strong first quarter with very strong domestic demand despite the weak external sector,” said Pedro Tuesta, senior Latin America economist at research firm 4Cast Inc in Washington.

He said that was why most economists did not believe Europe’s debt troubles would be of much importance to Brazil.

Brazil’s vast consumer market is driving brisk growth at a time when traditional powerhouses like the United States and Europe are struggling to get back on track.

Among the sectors posting strong growth were capital spending, surging 7.4 percent on a quarter-on-quarter basis; industry, up 4.2 percent; and agriculture, up 2.7 percent, the government’s statistics agency IBGE said.

Underscoring the strength of Brazil’s economy, the IBGE also revised GDP figures for previous quarters higher. The agency said the economy grew 2.3 percent in the fourth quarter over the third, compared to a previously reported 2 percent.

Third-quarter growth came in at a revised 2.2 percent, from a previously-reported 1.7 percent, over the second quarter.

That stronger basis of comparison made the first-quarter expansion all the greater.

The benchmark Bovespa stock index .BVSP, which has seen choppy trading recently on worries about the global economy, advanced on opening.

Yields on interest rate futures contracts <0#DIJ:> rose, as well, as investors saw the data as raising the likelihood of higher interest rates in coming weeks.

FIRST QUARTER KEY

Some analysts believe Brazil’s economy is overheating and cannot sustain such lofty growth rates without stoking inflation, which has picked up sharply in recent months.

Government tax breaks on cars and domestic appliances that helped lift Brazil out of a shallow recession last year were still in place in the first quarter, even as the rebounding economy gathered steam.

“This strong rate of growth suggests a good performance for further quarters, because this rate is difficult to cool quickly,” said Silvio Campos Neto, the chief economist for Banco Schahin. “But the (future) rates will be a little lower, even on the basis of the high comparison.”

The International Monetary Fund now ranks Brazil, once a chronic underperformer, as the world’s eighth biggest economy.

The economic expansion is likely to benefit President Luiz Inacio Lula da Silva’s candidate in October’s presidential election, Dilma Rousseff of the ruling Workers’ Party. Rousseff is rising in the polls partly because voters associate the boom with Lula, whose policies she has vowed to continue.

The GDP figures precede Wednesday’s release of inflation data and a central bank interest rate decision.

On Wednesday morning, the IBGE will release benchmark IPCA consumer price index data for May. Analysts in a Reuters poll predicted a median increase of 0.43 percent. The index rose 0.57 percent in April. [ID:nN07262058]

The central bank uses the IPCA to guide interest rate decisions, and on Wednesday evening, the bank is expected to raise its benchmark interest rate in its latest attempt to cool the economy.

Policymakers hiked the rate, called the Selic, to 9.5 percent from 8.75 percent in April, and most analysts surveyed by Reuters expect another 0.75 percentage point hike to 10.25 percent this week. [ID:nSPG002929]

For details on the IBGE's first-quarter GDP figures see: here&id_pagina=1 (Reporting by Rodrigo Viga Gaier and Stuart Grudgings; Writing by Luciana Lopez; Editing by Andrea Ricci)

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