UPDATE 2-Brazil economy beats forecasts in 2nd qtr, but slowdown ahead
* Brazil Q2 GDP grows 1.5 pct, above estimates
* Economists see slowdown in third quarter
* Real gains, yields on rate futures rise
SAO PAULO, Aug 30 (Reuters) - Brazil's economy grew at its fastest in more than three years in the second quarter, breaking a long streak of weak results for Latin America's largest economy, but rising interest rates and other problems mean the respite will likely be short-lived.
Economists said the good performance was probably a short-term rebound after President Dilma Rousseff passed a slew of stimulus measures to spur investment. Many expect little to no growth in the second half of the year.
Brazil's gross domestic product grew 1.5 percent from the first quarter, statistics agency IBGE said on Friday. Economists had forecast 0.9 percent growth.
The pick-up, more than doubling the pace of growth recorded in the first three months of the year, contrasts with slower second-quarter growth in emerging market peers such as India and China, while Mexico's economy contracted.
The upbeat numbers were welcome news for the left-leaning Rousseff, who has been heavily criticized by investors for some of her economic policies and whose popularity tumbled following a wave of massive street protests in June.
"What really stood out was industry and investments, which performed well, but consumption was weak," said Newton Rosa, chief economist at SulAmerica Investimentos in Sao Paulo. "We are seeing a signal that the growth in the second quarter is not going to be maintained in the third quarter."
Brazil's real jumped nearly 1 percent on the news while yields on interest rate futures rose, signaling increased bets on a longer monetary tightening cycle by the central bank.
Investments, as measured by gross capital expenditure, rose for a third straight quarter, gaining 3.6 percent from the previous one. Industrial output expanded 2.0 percent and agriculture 3.9 percent, while household consumption, one of Brazil's main growth engines over the past decade, edged up 0.3 percent.
With Brazil's economy stuck in low gear since Rousseff took office in 2011, her government offered tens of billions of dollars in stimulus measures such as tax breaks and subsidized credit lines.
The central bank also kept interest rates at record lows for nearly one year until starting a tightening cycle in April which has brought benchmark credit costs to their current 9 percent.
FARM SECTOR DOES WELL
While the stimulus measures helped support manufacturers and local exporters, many of the steps taken by Rousseff have also fueled inflation and hurt Brazil's public accounts, with limited capacity to sustain economic growth for a long time without broader reforms, economists say.
"It was better than we expected, but the positive surprise was concentrated in the agricultural sector. It doesn't change the outlook for the economy," said Gustavo Mendonca, an economist at Saga Capital in Rio de Janeiro.
"Industry is lagging, we are seeing a slowdown in retail and the impact of the protests, inflation is high, higher interest rates are beginning to have an effect, and data on credit is showing weakness. People may revise their forecasts up for the year, but not by much," Mendonca added.
Even if Brazil's economy posts zero growth in the second half of the year, its surprising performance between April and June should ensure an annual growth above 2 percent in 2013, more than doubling the previous year's mediocre pace.
It also makes it very likely that Brazil will outperform Mexico this year, despite market optimism over economic reforms in Latin America's second largest economy. Mexico's GDP shrank 0.7 percent between April and June and is likely to grow by just 1.8 percent this year, the government said.
Brazil's economy grew 3.3 percent in the second quarter when compared to the year-earlier period, IBGE said. That was above expectations for growth of 2.5 percent in the Reuters poll.