UPDATE 3-Brazil economy shows signs of life, but markets fall
* Brazil GDP grows 0.9 percent in 2012; 0.6 pct in Q4 vs Q3
* Sharp slowdown from boom years spurred government stimulus
* Investment recovers after four quarters of declines
SAO PAULO, March 1 (Reuters) - Brazil's economy grew slightly faster in the last three months of 2012 and investment rebounded, although business leaders still predicted a tough year ahead because of stubborn inflation and severe bottlenecks in infrastructure.
The economy grew 0.9 percent last year, the government's statistics institute said on Friday, a disappointing performance following last decade's boom. Along with currency losses, it caused Brazil to fall back behind Britain to the No. 7 spot among the world's largest economies, a symbolic dent in the country's aspirations for more wealth.
Growth of 1.4 percent on an annual basis in the fourth quarter suggested that President Dilma Rousseff's flurry of tax cuts and other stimulus measures may finally be bearing fruit following a broad slowdown in big emerging markets that also enveloped China, India and Russia in 2012.
In the most hopeful sign, investment rose 0.5 percent, snapping a string of four straight quarterly declines.
Yet Brazil's financial markets still sagged after the data was released, reflecting disappointment that the rebound was not stronger and a belief that the economy will grow about 3 percent at best this year.
"The data isn't inspiring and you need to be cautiously optimistic," said Luciano Rostagno, chief strategist at Banco WestLB in Sao Paulo. "The economy is in fact recovering, but at a very slow pace."
Brazil's current malaise is in part the product of its success last decade, which saw some 30 million people lifted from poverty and economic growth rates often above 5 percent.
The fast growth has led to severe overcrowding on roads and highways and caused labor and input costs to soar, creating huge problems for manufacturers and others. In one powerful example, Brazil expects to have a record harvest in 2013 but many farmers say they will miss out on the bonanza entirely because they are paying ever-higher prices to get their crops to port.
Luiz Aubert Neto, president of the Abimaq machinery producers association, complained that high operating costs and an overvalued currency mean it's often "cheaper to buy things on 5th Avenue in New York than at a mall in Sao Paulo."
"The country is extremely expensive," Neto said. "How can a country with nearly full employment and record tax collection not grow? Something's wrong here."
HOUSEHOLD SPENDING A BRIGHT SPOT
Rousseff has scrambled to address the bottlenecks with record-low interest rates, billions of dollars in tax cuts, and government intervention in currency markets that has led to a slightly weaker real over the past 18 months.
Yet due largely to Brazil's bottlenecks, inflation has risen to 6.15 percent on an annual basis, near the 6.5 percent ceiling of the central bank's target range, even as growth remains slow. That has raised the prospects of interest rate hikes this year that could hinder the recovery before it fully takes flight.
The Bovespa share index fell about 1.5 percent by midday, in part because of disappointment with the GDP data, traders said. The real also shed 0.3 percent.
Finance Minister Guido Mantega told reporters Friday's data showed the economy accelerated throughout 2012 and into the first few months of 2013, and he expected the economy to grow between 3 and 4 percent this year.
Growth in the fourth quarter was led by a strong performance in services. Household consumption rose 1.2 percent, its best performance since the last quarter of 2010, when the economy was still thriving.
Manufacturing remained stuck in its years-long malaise, falling 0.5 percent in the fourth quarter. Agriculture also struggled, falling 2.3 percent in 2012, which Mantega blamed on a drought in Brazil's northeast.
"The farm sector sure is going backwards," said Casario Ramalho, head of Brazil's Sociedade Rural farm lobby. "It's unstimulated, without investment."
The IBGE revised down the economy's third-quarter growth to 0.4 percent compared to the second quarter from a previously reported 0.6 percent.
Brazil grew 1.4 percent in the fourth quarter when compared to the year-earlier period, IBGE said. That was below expectations for growth of 1.6 percent in the Reuters poll.
Brazil's economy was worth $2.2 trillion at the end of 2012, the IBGE said. Brazil fell back behind Britain in terms of size, since that country's GDP was worth $2.3 trillion.