UPDATE 4-Brazil economy surges in 2010; growth seen cooling

* Economy grows 5 pct in 4th quarter from year earlier

* Finance Minister sees 4.5 to 5 pct growth in 2011

* Full-year 2010 growth at 7.5 percent, seen unsustainable

* Household spending strong, but industrial output drags
(Adds president’s remarks, writes through)

By Luciana Lopez and Silvio Cascione

SAO PAULO, March 3 (Reuters) – Brazil’s economy grew at its
fastest pace in 24 years in 2010, gaining steam at the end of
the year on buoyant consumer demand while industry struggled to
cope with a strong currency.

Last year’s 7.5 percent expansion, not far behind growth
rates in China and India, is likely as good as it gets for
Latin America’s largest economy for some time as higher
interest rates and tighter public spending cool domestic demand
and slow growth to a more sustainable pace in 2011.

The rapid growth, driven by record-low unemployment and a
confident new middle class of free-spending consumers, crowned
the presidency of Luiz Inacio Lula da Silva, who bowed out last
year with an approval rating just shy of 90 percent.

But the tax breaks and loose spending that helped boost the
economy left a fiscal mess for Lula’s hand-picked successor,
Dilma Rousseff, now grappling with inflation above 6 percent.

“We’re cutting the budget now because, for us, controlling
inflation is one of the most important matters,” Rousseff told
reporters in Brasilia on Thursday.

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Brazil’s economic growth: http://r.reuters.com/tux38r

Latin American currencies: http://r.reuters.com/sux38r

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“The 7.5 rate deserves our praise, but we’re always going
to be looking for a reasonable growth rate, 4.5 to 5 percent,
which is sustainable and permanent,” she said.

That’s about the growth rate that Brazil will see this
year, according to Finance Minister Guido Mantega, who said
still robust domestic demand and investment would continue to
drive the economy in 2011.

The full-year expansion compares with 10.3 percent growth
in China last year and expected growth of around 8 percent in
India, highlighting the strength of emerging economies compared
to their still-struggling European and U.S. counterparts.

But Brazil’s maddening bureaucracy, complex tax code and
severe infrastructure woes make such a clip unsustainable.

The economy, which rebounded from a 0.6 percent contraction
in 2009, grew 5.0 percent in the fourth quarter of 2010 from
the same period a year earlier, in line with expectations.

Household consumption, which has been a main pillar of
Brazil’s economic boom in recent years, rose a brisk 2.5
percent in the fourth quarter from the previous three months as
Brazilians continued to brandish their wallets.

Armed with credit cards and rising wages, new members of
the middle class are buying cars in record numbers and taking
their first-ever foreign vacations. Restaurant seating in Sao
Paulo, the country’s largest city, often spills over onto
sidewalks as families skip eating at home.

But industrial output dropped 0.3 percent, highlighting the
burden of a strong currency (BRBY: Quote, Profile, Research) on business, while
agriculture in a global breadbasket slipped 0.8 percent.

“The bigger concern is that it’s a two-speed growth story:
consumers remained the key driver of growth and exporters are
lagging behind in this recovery,” said Neil Shearing, an
economist at Capital Economics in London.

FINDING BALANCE

Some analysts call this year’s growth estimates too rosy,
given about $30 billion in pledged public spending cuts, higher
interest rates and tighter bank reserve requirements.

“Growth last year was mostly concentrated in the first
quarter, with a strong carry-over,” said Mauricio Rosal, Latin
American economist at Raymond James in Sao Paulo.

“Growth will be a lot lower this year, maybe half of what
we saw last year,” he added.

Rousseff has pledged to cut spending heavily to ease demand
pressures in the world’s 8th biggest economy. Meanwhile, the
central bank hiked interest rates for the second time in three
months on Wednesday, raising the benchmark rate to 11.75
percent from 11.25 percent. [ID:nN01145534]

Economists expect more rate hikes given that annual
inflation, at 6.08 percent, is running above the government
target of 4.5 percent, plus or minus 2 percentage points.

Benchmark inflation data on Friday will likely confirm that
outlook. The 0.85 percent median forecast in a Reuters poll
would be the biggest calendar-month jump since April 2005.

Yields on longer-dated interest rate futures contracts
(0#DIJ:: Quote, Profile, Research) rose on Thursday as investors priced in higher
borrowing costs in coming years.

The economy expanded 0.7 percent in the fourth quarter when
compared to the previous quarter, falling just short of the 0.9
percent median forecast of 20 analysts polled by Reuters.

Capital spending, a gauge of investment, rose 0.7 percent
on a quarter-on-quarter basis and a whopping 21.8 percent for
all of 2010. The central bank said that figure indicates that
businesses are confident in Brazil’s economic outlook in the
coming years. [ID:nSAQ002605]
(Additional reporting by Rodrigo Viga Gaier in Rio de Janeiro
and Jeferson Ribeiro in Brasilia; Writing by Stuart Grudgings;
Editing by Todd Benson and Diane Craft)