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Sao Paulo - Brazil's economy ended 2013 on a positive note thanks to strong consumer spending and investment, providing a much-needed boost to President Dilma Rousseff as she tries to rebuild her credibility with investors and win reelection in October.
Gross domestic product expanded 0.7% in the fourth quarter compared to the third quarter, the government statistics institute said on Thursday.
That was more than twice the amount expected by economists, and it pushed the economy to 2.3% growth on an annual basis for the full year of 2013.
Such growth is a far cry from the dynamic 4 to 5% annual levels often seen last decade, when Chinese demand for commodities helped make Brazil a star among emerging markets.
Poor infrastructure, high consumer debt and sagging business confidence have brought Latin America's biggest economy back to earth since then, prompting fears of a long period of stagnant growth ahead, possibly for years to come.
But Brazil's 2013 GDP growth was still more than twice as fast as Mexico, which has in recent years surpassed it as an investor favorite in the region. Meanwhile, a 6.3% jump in investment last year should over time help ease some of the bottlenecks holding the economy back.
It will also give Rousseff a major calling card with business leaders as she tries to atone for policy errors early in her left-leaning presidency and convince them her second term will be more market-friendly. "It's a good result, since there was more investment, and you could see a reduction in the mismatch between supply and demand. It suggests the economy is growing with a better makeup than it was before," said Jankiel Santos, chief economist at Espirito Santo investment bank in Sao Paulo.
Santos and other economists cautioned against getting carried away by optimism, though. Retail sales and industrial data suggest 2014 will be a tougher year, with several challenges including a severe drought and problems in neighboring Argentina dragging on activity. Indeed, the data published on Thursday contained plenty of grist for both bulls and bears.
On the positive side, household spending expanded 0.7% in the fourth quarter compared to the third quarter, while government spending grew 0.8%. For the full year, agriculture grew 7% compared to 2012, thanks to record sugar cane, soy and corn harvests.
However, industry shrank 0.2% in the fourth quarter, dragged down by a 0.9% fall in manufacturing. Brazil's factories have been struggling for years with high labor costs, bad infrastructure and low productivity.
Brazil's economy had been expected to grow just 0.3% in the fourth quarter, according to the median forecast of 43 analysts polled by Reuters.
The quarterly result represented a strong rebound after the economy had contracted 0.5% in the third quarter. Many economists believed that growth could have been negative again in the fourth quarter, which would have meant a recession.
The rise in government spending was also a mixed blessing. While it helped boost the economy, loose fiscal policy has also pushed up inflation and raised the threat of a credit downgrade by ratings agency Standard & Poor's. Elevated inflation has dented business and consumer confidence, prompting the central bank to raise interest rates off record lows to 10.75% in a non-stop cycle since April last year.
It also eroded purchasing power, leading to the worst year for retail sales in a decade. The economy grew 1.9% in the fourth quarter compared to a year earlier, IBGE said. That surpassed expectations by analysts polled by Reuters for growth of 1.6%. For a breakdown of Brazil's GDP data by sector.
