UPDATE 6-Brazil’s economy booms in Q2, defying predictions

* Brazil Q2 GDP grows 1.2 pct from Q1 vs 0.7 pct forecast

* Economy expands 8.8 percent from year-ago period

* Growth will help ruling party presidential candidate
(Adds central bank president comments, updates yields)

By Luciana Lopez

SAO PAULO, Sept 3 (BestGrowthStock) – Brazil’s economy grew 8.8
percent in the second quarter, defying forecasts of a steep
slowdown as booming investment and strong consumer demand
helped it outshine struggling economies in the developed
world.

Compared with the first quarter, gross domestic product
expanded 1.2 percent in the second quarter (BRGDP=ECI: ), the
government’s statistics agency IBGE said on Friday.

That outstripped expectations of 0.7 percent quarterly and
8 percent annual growth in a Reuters survey.

The solid growth in Latin America’s largest economy — the
world’s eighth-largest — adds more evidence to the growing
clout of emerging markets, many of which have posted stronger
growth rates this year than more-developed nations.

With a presidential election only a month away, the robust
growth data could give an added boost to ruling party candidate
Dilma Rousseff, who is already surging in the polls thanks to
the popularity of her political benefactor, outgoing President
Luiz Inacio Lula da Silva.

The latest data fueled speculation that interest rates may
rise again in 2011 to control inflation and prevent
overheating. But the central bank tried to reassure markets on
Friday that it would not spur higher interest rates.

“The central bank is totally comfortable with this growth,
absolutely within forecasts,” said Henrique Meirelles, the
bank’s president. “We expect more moderate growth in the third
and fourth quarter, so that the economy grows in balance over
the long term,” he added. Growth in those quarters should
average about 0.7 percent, he said.

Yields on Brazilian interest rate futures contracts
(0#DIJ:: ) rose nonetheless. The yield on the contract due
January 2012 (DIJF2: ), the most active of the session, rose to
11.36 percent in the afternoon from 11.31 percent. The yield
rose as high as 11.41 percent earlier in the session.

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Instant view on the GDP data: [ID:nN03257654]

Factbox on political risks in Brazil: [ID:nRISKBR]

Graphic on GDP growth: http://link.reuters.com/mar39n

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With growth expected to slow next year, the government sees
no need for additional measures to brake activity, Finance
Minister Guido Mantega said on a conference call.

“This year we’ll have an unusual result for Brazil, with a
high rate of expansion, with inflation near the center of the
government target,” he said, adding that 2010 growth of at
least 7 percent was now certain.

The annual growth came largely on a 26.5 percent surge
year-on-year in capital spending, a sign that companies are
investing to keep up with future demand. Industrial output grew
13.8 percent and household consumption expanded 6.7 percent
even as interest rates rose during the quarter.

While the economy is poised to slow in the coming quarters,
the second-quarter expansion was still fast enough to feed
expectations of monetary tightening in 2011.

“Even though there has been a small slowdown it was still a
very strong quarter, driven by family spending and domestic
demand,” said Marianna Costa, an economist with Link
Investimentos. “Strong activity shows that the probability of a
new cycle of interest rate hikes next year is higher.”

RATE HIKES IN 2011?

Brazil’s whopping 9 percent growth in the first quarter
from the year-ago period was its fastest pace in more than a
decade and, many analysts said, unsustainable.

The government stepped on the brakes: tax breaks on cars
and home appliances that had drawn shoppers into malls and
showrooms faded, and the central bank hiked the benchmark
interest rate from a record-low 8.75 percent to 10.75 percent.

“This (GDP) number shows that the economy is still growing
briskly, even after the withdrawal of the measures that fueled
exceptional growth in the first quarter,” said Newton Rosa,
chief economist with SulAmerica Investimentos.

On Wednesday the central bank said that the interest rate
hikes had done their job, and it held the Selic rate at 10.75
percent, ending a tightening cycle that began in April.

But with the economy barely slowing in the second quarter
from its breakneck pace of the first, the government might need
to slow things down more next year to prevent inflation from
speeding too far above the official target of 4.5 percent, plus
or minus 2 percentage points.

Brazil’s growth could also put it on pace to move up the
ranks of world economies. Already, a slew of politicians have
said the country could become the world’s fifth-biggest in
coming years, from its current ranking at eighth, according to
the International Monetary Fund.

The economic growth of recent years has brought millions of
people out of poverty and boosted the widespread popularity of
Lula, who will leave office on Jan. 1, 2011.

His candidate in the Oct. 3 election, Rousseff, is closely
identified with his policies, and some polls predict she’ll be
elected in the first round of voting.

For details on the IBGE’s GDP figures see:
http://www.ibge.gov.br/home/presidencia/noticias/noticia_visualiza.php?id_noticia=1705&id_pagina=1
(Additional reporting by Rodrigo Viga Gaier and Stuart
Grudgings in Rio de Janeiro and Vanessa Stelzer and Samantha
Pearson in Sao Paulo, Editing by Todd Benson, W Simon, Leslie
Adler and Dan Grebler)

UPDATE 6-Brazil’s economy booms in Q2, defying predictions