Brazil’s economy expanded more than forecast by all analysts in the second quarter, as government stimulus propped up investment and a weaker real boosted the outlook for manufacturing.

Gross domestic product expanded 1.5 percent during the April to June period, or an annualized 6 percent, the national statistics agency said today. That was the most since the first quarter of 2010 and more than all 44 forecasts from analysts surveyed by Bloomberg, whose median estimate was 0.9 percent. GDP expanded 3.3 percent from the same quarter last year.

President Dilma Rousseff has slashed payroll taxes and boosted subsidized lending to companies in her bid to pull Latin America’s largest economy out of a two-year slowdown ahead of elections next year. Those efforts are being undermined by inflation that’s hovering near the 6.5 percent upper limit of the government’s target range and is forcing the central bank to raise borrowing costs. The real has declined more than any other major currency in the past three months, further pressuring prices.

“Growth is being pushed up by investments and last year we saw the economy driven by consumption,” Luciano Rostagno, chief strategist for Banco Mizuho do Brasil SA, said in a phone interview from Sao Paulo. “Now we have a better mix of growth. So yes, the measures had some positive effects on the economy, but the problem is inflation remains high.”

Raising Forecasts

Following the release of today’s report in Rio de Janeiro, Bradesco BBI raised its forecast for growth this year to 2.6 percent from 2.2 percent, citing the benefits of a weaker real and payroll tax breaks for industry. Goldman Sachs Group Inc. played down the performance, saying leading indicators suggest growth will be virtually flat in the third quarter.

Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, rose four basis points, or 0.04 percentage point, to 10.45 percent at 1:38 p.m. local time. The real, which has declined 11 percent in the past three months, weakened 0.8 percent to 2.3791 per U.S. dollar.

The worst is over for Brazil, and improving international conditions bode well for growth of 4 percent in 2014 and beyond, Finance Minister Guido Mantega told reporters today in Sao Paulo. Mantega held the government’s 2.5 percent forecast for 2013, adding that second-quarter growth won’t pressure inflation.

Investment Rates

Today’s GDP data beat analysts’ median forecast for the first time since the last quarter of 2011. Investment, which declined last year as Brazil expanded at a quarter of the 3.5 percent pace of the global economy, continued to recover, jumping 3.6 percent in the second quarter. Despite the rebound, Brazil still has one of the lowest investment rates of major emerging markets at 18.6 percent of GDP.

“I don’t think in coming months there will be a reversal in the march of investments, which was the biggest stimulator of the economy,” Mantega said in a conference call. “The conditions that brought about that investment increase will remain: very large reduction of investment costs, reduction of taxes, low cost of financing, and conditions to expand investment in coming years.”

Agriculture rose 3.9 percent, while a weaker real helped industry expand 2 percent and exports jump 6.9 percent.

Rousseff’s government has said manufacturers will get a boost from the weaker real, after a commodities-fueled rally in the currency over the past decade eroded industry’s competitiveness and opened up a flood of imports.

Currency Slide

In the near-term, the slide in the currency is challenging the central bank’s ability to curtail inflation, which has remained above the 4.5 percent midpoint of the target range since Rousseff took office in January 2011, reaching a 20-month high (BZPIIPCY) of 6.7 percent in June. Price increases subsided to 6.27 percent in July as food prices declined. Inflation contributed to a slowdown in household spending, Mantega said.

To curb volatility in the foreign exchange market, the central bank this month announced a $60 billion intervention program.

Spending restraint by the government could also help ease price pressures, though that may prove more difficult with Rousseff gearing up for an expected re-election run and the government targeting 4 percent growth, said Daniel Snowden, emerging-markets analyst at Informa Global Markets. Analysts surveyed last week by the central bank forecast growth of 2.2 percent this year and 2.4 percent in 2014.

‘Go Big’

“If they go big, that will help boost growth, but 4 percent is a lot, especially considering the global backdrop is not massively helpful,” Snowden said by phone from London.

With private banks restricting credit in the first half of 2013, public lenders stepped up their efforts, disbursing at six times the rate of their private counterparts. Brazil’s development bank BNDES lent a record 88 billion reais ($37 billion) over that period, with about two-thirds going to infrastructure and industry. That will continue as lending balloons to as much as 190 billion reais this year, BNDES president Luciano Coutinho said Aug. 14.

The government plans three electricity auctions this year to draw 100 billion reais in investments and also will auction rights to develop Brazil’s biggest oil discovery in October.

Industry confidence, as measured by the national industry confederation known as CNI, fell to its lowest level in four years in July, before rebounding in August. Consumer confidence, as measured by the Getulio Vargas Foundation, did the same. Mantega said the pick-up in growth in the second quarter will help boost confidence.

“The second quarter was a bright spot,” Carlos Kawall, chief economist at Banco J. Safra SA, said by phone from Sao Paulo before today’s report. “Third quarter will for sure be weaker, but we have no evidence so far that that the economy has collapsed.”

Bloomberg