Hefty government spending ends Brazil's recession, for now

By Silvio Cascione

BRASILIA (Reuters) - Brazil probably escaped recession in the third quarter due to higher government spending, a Reuters poll showed on Tuesday, suggesting the economy is particularly vulnerable to potential budget cuts currently in the works.

Data due out on Friday will likely show Brazil's gross domestic product grew by a seasonally adjusted 0.3 percent from July through September from the previous three months, according to the median forecast of 36 economists.

Brazil's economy shrank in the first two quarters of 2014, marking its first technical recession in five years.

The timid recovery was probably helped by an increase in investments, seen growing for the first time in more than a year. That would be good news for Brazil, which has suffered from high inflation and low competitiveness since the end of last decade's Chinese-fed commodities boom.

But the other leg of faster third-quarter growth was hefty government spending, which economists say needs to be reduced as soon as possible to avoid credit-rating downgrades and a potential crisis.

Credit Suisse estimated public spending grew 1.7 percent in the third quarter from the second period as President Dilma Rousseff and incumbent governors sought re-election in an October national vote.

"We believe this (third-quarter growth) will be short-lived and Brazil will be back in recession in 2015," said Morgan Stanley economist Arthur Carvalho, who expects a sustained rise in unemployment after a long run near record lows.

Compared with the same quarter in 2013, the economy probably shrank 0.1 percent , according to the median forecast of 30 economists.

Rousseff pledged to cut spending in her second term, though she said the government would try to avoid causing damage to economic growth. She is expected to announce a new economic team on Thursday led by Joaquim Levy, the former Treasury Secretary, as Finance Minister.

Levy, who holds a Ph.D. from the University of Chicago, could announce budget freezes and tax hikes to shore up Brazilian finances, according to local media.

Forecasts for the quarterly growth rate ranged from minus 0.1 to 0.6 percent, while estimates for the year-on-year rate ranged from minus 0.4 to 0.2 percent.

A central bank proxy of GDP data rose 0.6 percent in the third quarter from the second period.

(Editing by Jeffrey Benkoe)