Brazil GDP sluggish in 2011; recovery to be modest

Brazil's economy grew just 2.7 percent in 2011 as soaring business costs and uncompetitive industries took the shine off of what had been one of the world's most dynamic emerging markets, and data released on Tuesday pointed to only a modest recovery ahead this year.

The sharp slowdown during President Dilma Rousseff's first year in office, which saw Brazil underperform almost all of its peers in Latin America following 7.5 percent growth in 2010, will pile pressure on the left-leaning leader to take new measures to stimulate the economy in coming weeks.

Investors bet the weak performance would also lead the central bank to slash interest rates more aggressively, with a cut of at least half a percentage point, and possibly 75 basis points, expected following the bank's meeting on Wednesday.

Strong activity in agriculture and resilient consumer spending helped Brazil return to modest growth in the fourth quarter, reinforcing economists' expectations that growth will accelerate somewhat during 2012. Activity expanded 0.3 percent following a revised 0.1 percent contraction in the previous quarter, government statistics agency IBGE said.

Yet overall, the data reinforced the biggest concern of Rousseff and many business leaders - that Brazil may be downshifting into a new era of mediocre 3 percent annual growth as a tight labor market, an overvalued exchange rate and other costs prevent the economy from expanding any faster.

The biggest drag on Brazil's economy continues to be industry, which contracted 0.5 percent in the fourth quarter compared with the previous quarter. Manufacturers have blamed most of their problems on Brazil's currency, which has strengthened about 40 percent since the depths of the financial crisis in 2009 and 6 percent this year.

Rousseff has implemented targeted tax incentives in recent months to try to help sectors such as autos and consumer goods that have struggled. Her government has also raised the ire of some countries and multinational companies by threatening to raise tariffs on auto imports from Mexico, for example.

Rousseff's aides say that more stimulus measures are likely in coming weeks. However, many business leaders and politicians say that the core problems are more related to high taxes and other costs that will necessitate tough economic reforms to fix - something Rousseff has shown little interest in doing.

Rousseff and other officials have in recent days blamed rich countries for Brazil's problems, saying that Europe's efforts to escape its crisis by flooding the globe with cheap money has caused costs to rise in emerging market nations like Brazil.

The economy grew 1.4 percent in the fourth quarter compared to the year-earlier period, IBGE said