By Luciana Lopez
SAO PAULO (Reuters) - Brazil's economy grew 8.8percent in the second quarter, defying forecasts of a steepslowdown as booming investment and strong consumer demandhelped it outshine struggling economies in the developedworld.
Compared with the first quarter, gross domestic product expanded 1.2 percent in the second quarter, thegovernment's statistics agency IBGE said Friday.
That outstripped expectations of 0.7 percent quarterly and8 percent annual growth in a Reuters survey.
The solid growth in Latin America's largest economy -- theworld's eighth-largest -- adds more evidence to the growingclout of emerging markets, many of which have posted strongergrowth rates this year than more-developed nations.
The solid growth in Latin America's largest economy -- theworld's eighth-largest -- adds more evidence to the growingclout of emerging markets, many of which have posted strongergrowth rates this year than more-developed nations.
The latest data fueled speculation that interest rates mayrise again in 2011 to control inflation and preventoverheating. But the central bank tried to reassure marketsFriday that it would not spur higher interest rates.
"The central bank is totally comfortable with this growth,absolutely within forecasts," said Henrique Meirelles, thebank's president. "We expect more moderate growth in the thirdand fourth quarter, so that the economy grows in balance overthe long term," he added. Growth in those quarters shouldaverage about 0.7 percent, he said.
Yields on Brazilian interest rate futures contracts rose nonetheless. The yield on the contract dueJanuary 2012, the most active of the session, rose to11.36 percent in the afternoon from 11.31 percent. The yieldrose as high as 11.41 percent earlier in the session.
With growth expected to slow next year, the government seesno need for additional measures to brake activity, FinanceMinister Guido Mantega said on a conference call.
"This year we'll have an unusual result for Brazil, with ahigh rate of expansion, with inflation near the center of thegovernment target," he said, adding that 2010 growth of atleast 7 percent was now certain.
The annual growth came largely on a 26.5 percent surgeyear-on-year in capital spending, a sign that companies areinvesting to keep up with future demand. Industrial output grew13.8 percent and household consumption expanded 6.7 percenteven 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 feedexpectations of monetary tightening in 2011.
"Even though there has been a small slowdown it was still avery strong quarter, driven by family spending and domesticdemand," said Marianna Costa, an economist with LinkInvestimentos. "Strong activity shows that the probability of anew cycle of interest rate hikes next year is higher."
RATE HIKES IN 2011?
Brazil's whopping 9 percent growth in the first quarterfrom the year-ago period was its fastest pace in more than adecade and, many analysts said, unsustainable.
The government stepped on the brakes: tax breaks on carsand home appliances that had drawn shoppers into malls andshowrooms faded, and the central bank hiked the benchmarkinterest rate from a record-low 8.75 percent to 10.75 percent.
"This (GDP) number shows that the economy is still growingbriskly, even after the withdrawal of the measures that fueledexceptional growth in the first quarter," said Newton Rosa,chief economist with SulAmerica Investimentos.
On Wednesday the central bank said that the interest ratehikes had done their job, and it held the Selic rate at 10.75percent, ending a tightening cycle that began in April.
But with the economy barely slowing in the second quarterfrom its breakneck pace of the first, the government might needto slow things down more next year to prevent inflation fromspeeding too far above the official target of 4.5 percent, plusor minus 2 percentage points.
Brazil's growth could also put it on pace to move up theranks of world economies. Already, a slew of politicians havesaid the country could become the world's fifth-biggest incoming years, from its current ranking at eighth, according tothe International Monetary Fund.
The economic growth of recent years has brought millions ofpeople out of poverty and boosted the widespread popularity ofLula, who will leave office on Jan. 1, 2011.
His candidate in the Oct. 3 election, Rousseff, is closelyidentified with his policies, and some polls predict she'll beelected 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 StuartGrudgings in Rio de Janeiro and Vanessa Stelzer and SamanthaPearson in Sao Paulo, Editing by Todd Benson, W Simon, LeslieAdler and Dan Grebler)
