September 1, 2017 / 12:56 PM / a year ago

UPDATE 2-Brazil consumers lead stronger-than-expected quarterly growth

(Updates with analyst comments)

By Bruno Federowski

SAO PAULO, Sept 1 (Reuters) - The Brazilian economy grew more than expected in the second quarter due to an upswing in consumer spending, as a recovery from the deepest recession in a century remained on track.

Growth in Latin America’s largest economy slowed after a bumper soy harvest in the first quarter, data from statistics agency IBGE showed on Friday, but falling inflation and interest rates paved the way for a slow and steady recovery ahead.

Gross domestic product expanded 0.2 percent from the first quarter and 0.3 percent from a year earlier. Economists had expected GDP to grow 0.1 percent on a quarterly basis and remain flat from the year before, according to a Reuters poll.

Household spending rose for the first time in 10 quarters, helped by a government measure letting workers withdraw from a severance fund that injected 44 billion reais ($14 billion) into the economy from March 10 through July 31.

Economists said consumer spending should keep growing, although at a slower pace, and may be a principal motor of Brazil’s rebound.

“There’s been consistent improvement in factors driving consumption: Lower inflation and interest rates are boosting available household income,” said Banco Santander economist Rodolfo Margato.

The top Brazilian GDP forecaster in recent Reuters polls, Santander sees 0.5 percent economic growth in 2017.

“The pace of investments in 2018 will determine whether GDP will grow 1.5 percent or 3 percent,” Margato said.

The second straight quarter of growth should bring some relief to President Michel Temer, who is grappling with single-digit approval ratings.

Investors see Temer’s austerity drive as critical to closing a record fiscal deficit and boosting economic activity in the long run, but it has been a tough sell amid record-high unemployment.

Brazil’s central bank has aggressively cut interest rates and is expected to continue doing so as inflation holds near 18-year lows.

Despite lower borrowing costs, capital spending dropped 0.7 percent, extending a 30 percent decline since the third quarter of 2013. Investments made up 15.5 percent of GDP, the worst second-quarter performance since records began in 1996.

“It really is amazing how much investment has shrunk,” Goldman Sachs economist Alberto Ramos said. “ ... That hampers productivity and will conspire against growth going forward.”

Brazilian companies must cut debt and employ idle capacity before turning to new investments, analysts said, challenging an earlier consensus that the recovery would be investment-driven.

$1 = 3.13 reais Reporting by Bruno Federowski; Additional reporting by Rodrigo Viga Gaier; Editing by Brad Haynes and Lisa Von Ahn

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