Brazil economy disappoints, raising global fears

SAO PAULO (Reuters) - Brazil's economy posted extremely disappointing growth in the third quarter, piling pressure on President Dilma Rousseff to make deeper structural reforms and raising new fears that big emerging markets are getting dragged into the stagnant morass of the global economy.

Growth expanded just 0.6 percent in the third quarter from the second quarter, government statistics agency IBGE said on Friday. That was just half the pace expected by financial markets, and below any of the forecasts by 42 analysts in a Reuters poll.

Brazil's economy has been stuck in a pattern of slow growth since Rousseff took office last year, as companies struggle with high costs and severe infrastructure and labor bottlenecks. Rousseff has tried to revive activity with numerous tax cuts and other stimulus, but Friday's data showed that companies are not responding, as investment fell for a fifth straight quarter.

The weak data from Latin America's biggest economy was likely to reverberate in global markets, especially after India also posted lower-than-expected growth on Friday, putting it on track for its worst year in a decade.

The IBGE also revised down second quarter growth to 0.2 percent compared to the first quarter from a previously reported 0.4 percent.

"The numbers are truly disappointing. They indicate that despite all the stimulus injected in the economy, it's not reacting as hoped," said Jankiel Santos, chief economist for BES Investimento in Sao Paulo.

Brazil's economy was expected by analysts to grow just 1.5 percent this year, but those forecasts are now likely to be revised down after Friday's data.

The weak data renews fears that Brazil's slow growth is not a cyclical issue, but the result of deeply rooted structural problems after the soaring expansion of the previous decade.

Pressure is likely to mount on the left-leaning Rousseff to make far deeper changes to Brazil's restrictive labor laws as well as its complex and onerous tax code, which many companies say makes investment prohibitively expensive.

However, some of the problems may take years to sort out. The growth of the past decade has left Brazil's highways, ports and other infrastructure straining to keep up, while companies have struggled to find qualified workers as unemployment remains near historic lows.

Investment dropped for a fifth straight quarter, down 2.0 percent.

Household consumption was one of the few bright spots in the third quarter, rising 0.9 percent from the previous quarter. Industry also had its best performance since the second quarter of 2010, up 1.1 percent, as manufacturers responded to targeted tax cuts for cars and home appliances.

Gross domestic product had been expected to expand 1.2 percent in the third quarter over the second quarter.

Brazil grew 0.9 percent in the third quarter when compared to the year-earlier period, IBGE said. That was also far below expectations for growth of 1.9 percent, according to the Reuters poll.

(Additional reporting by Silvio Cascione; Editing by Todd Benson)