BRASILIA, Feb 2 (Reuters) - Brazil's economy could surprise markets and grow more than 1 percent in 2017 if Congress approves a controversial pension reform but otherwise the country could face a third year of recession, a senior member of the economic team told Reuters.
The official's prediction reflects the mood in the capital Brasilia among President Michel Temer's economic team, which is upbeat about the recovery but acknowledges that success hinges on unpopular austerity reforms.
"The pension reform will be the real test. Economic players are relying on that reform for their economic projections," said the official, who asked for anonymity to speak freely. "It either works or it does not ... If it doesn't work then we will have negative growth."
Given the slow pace of recovery from a crippling two-year recession, the International Monetary Fund revised down Brazil's growth estimate to only 0.2 percent while market economists see a timid expansion of 0.5 percent.
In December, the central bank revised down its 2017 forecast to 0.8 percent growth from 1.3 percent.
Signs that credit is picking up and consumers' debt burden is dropping, as well as rising commodity prices, could lead to a faster recovery this year, the official said.
To support that recovery, the official said, the government plans to announce next week the widening of the income brackets for applicants of a government-backed home ownership program known as Minha Casa Minha Vida.
Such measures, which also include the creation of a new bracket for the middle class, will add applicants for the program to bolster home construction and increase employment.
The government is also racing to finish next week an agreement with homebuilders on new industry rules giving companies higher compensation in the event of a canceled purchase, the official said.
Temer, who took over the presidency in May after his predecessor was impeached for alleged fiscal mismanagement, has unveiled a slew of measures to reduce credit costs as a way to rescue his dwindling popularity.
Still, a massive corruption investigation that involves some of his closest aides has raised doubts about his ability to approve an overhaul to one of the world's most generous and expensive pension systems.
The reform, which cuts retirement benefits and sets the minimum retirement age, faces fierce opposition from powerful labor unions that plan street demonstrations in coming weeks when Congress starts to debate the proposal.
Temer is moving to lower credit card interest rates and allow workers to access part of their severance fund known as FTGS, which could alone add 0.5 percentage points to the economy this year, the official said.
Despite the more positive growth outlook, the government has no plans to reduce its primary budget deficit target of 139 billion reais in 2017. The official said that rapidly falling inflation is expected to drag down tax income this year.
The official says he expects the Brazilian real to remain stable at around 3.20 and 3.30 per US dollar as the US economic recovery proves less robust than expected. The real closed at 3.14 per dollar on Wednesday. (Additional reporting by Daniel Flynn and Patricia Duarte; Writing by Alonso Soto; Editing by Chizu Nomiyama)