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By Silvio Cascione and Alonso Soto
BRASILIA, May 29 (Reuters) - Brazil's economy shrank 0.2 percent in the first quarter, setting the stage for a likely recession this year as companies slash investments and leftist President Dilma Rousseff tries to atone for policy missteps from her first term in office.
The economy's performance, reported by the government statistics agency on Friday, was better than median market expectations of a 0.5 percent contraction in a Reuters poll.
Brazil's short-term interest rate futures <0#DIJ:> rose early Friday as traders bet the economy's relative resiliency would make the central bank more likely to extend its recent cycle of rate hikes. The real also strengthened slightly against the dollar.
Since her second term began on Jan. 1, Rousseff has cut government spending, hiked several taxes and raised prices for electricity and other items.
She hopes such moves will regain investor confidence after many of the interventionist policies of her first four years in office backfired. But economists also expect the measures will cause the economy to shrink at least 1 percent this year, with little hope of a meaningful rebound until 2016 or later.
"The trend is for weaker growth going forward," said Cristian Maggio, head of emerging markets research for TD Securities in London. "Brazil is getting back into a recession."
The slightly better than expected performance was due primarily to strength in the agriculture sector, which grew 4 percent compared to the previous quarter as coffee prices rose.
Nevertheless, in a foreboding sign for the broader economy, investment fell 1.3 percent - marking the seventh straight quarter of declines, the longest such streak since record-keeping started in 1996.
Household consumption fell 1.5 percent, its worst quarterly performance since the depths of the global financial crisis in 2008, as many Brazilians struggled with debt they accumulated during an economic boom last decade.
Government consumption slipped 1.3 percent due to spending cuts, which Rousseff hopes will allow Brazil to keep its investment grade credit rating in coming years. (Writing by Brian Winter Editing by W Simon)