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POLL-Brazil growth to outpace Mexico as single-digit rates set to last

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BRASILIA, Oct 24 (Reuters) - Single-digit interest rates may be here to stay in Brazil, supporting the economy's recovery from its deepest recession in a century, a Reuters poll showed.

Latin America's No. 1 economy has for decades grappled with borrowing costs that are among the highest in the world. Fiscal measures are seen as necessary to ensure rates will remain at all-time lows, increasing the stakes for the 2018 presidential elections.

Low interest rates should put Brazil on track to outpace Mexico's economy for the first time in five years in 2018, the poll showed.

"There is a growing perception that the recent decline in Brazilian interest rates is somewhat sustainable, which should support economic growth," Nomura economist João Pedro Ribeiro said.

"That is certainly true for 2018, but whether it continues to be true in the following years will largely depend on the outcome of the elections."

Brazil's economy is expected to expand 0.7 percent this year and 2.3 percent in 2018, according to median forecasts in the poll, up from forecasts for 0.5 percent and 2.1 percent growth in a July poll.

That would spell a definite end to the country's recent recession, which slashed gross domestic product (GDP) by 8 percent between the fourth quarter of 2014 and end-2016.

Household spending will likely lead the recovery, as low interest rates reduce debt spending and slow inflation increases purchasing power.

Corporate investment in new facilities and equipment, meanwhile, is unlikely to improve substantially, with firms focused instead on burning through loads of debt.

Uncertainty related to the elections should also deter most long-term projects for now, economists said.

Brazil's benchmark Selic interest rate is seen falling to a record low of 7 percent by the end of this year from 8.25 percent currently and remaining at that level until the end of 2018.

That should not generate substantial price pressures, however, with consumer price inflation seen averaging 3.5 percent in 2017 and 4 percent in 2018, below the central bank's target of 4.5 percent.

This suggests economists are cutting estimates for the structural interest rate, the rate which neither boosts nor curbs inflation, allowing for lower long-term borrowing costs.

Economists at Credit Suisse put the structural interest rate at 6.9 percent at the end of 2016, which would indicate the central bank would still be forced to tighten policy as the economy heated up from 2019 on.

Central bank policymakers have stressed that consolidating interest rates at all-time lows hinges on the success of structural reforms, such as streamlining Brazil's costly pension system, loosening labor regulations or cutting red tape.

President Michel Temer has pursued some of those efforts. But such belt-tightening measures, coupled with a string of corruption scandals, have driven his approval rating to single digits and drained much of his political capital, transferring a large part of the burden to his eventual successor.

MEXICO TAKES STEP BACK

For years an investor darling, Mexico may see its fortunes turn as Brazil again takes center stage and domestic uncertainty saps confidence.

Mexico's GDP is expected to grow 2.1 percent this year and 2.2 percent in 2018, according to median estimates, up from 1.9 percent and 2.1 percent in the previous poll.

The longer-term outlook was mixed, with forecasts for 2019 growth ranging from just 0.9 percent to as high as 3.5 percent.

Economists at ING said markets are likely underestimating the risks posed by the 2018 presidential elections and talks between the United States, Mexico and Canada on trade.

Negotiations on the future of the North American Free Trade Agreement have been thornier than previously expected, potentially driving down investment by companies in Mexico.

The United States buys over three-quarters of Mexico's exports, underlining the potential damage if U.S. President Donald Trump follows through on threats to scrap NAFTA.

Mexico's 2018 presidential elections are also a source of uncertainty.

President Enrique Peña Nieto, whose efforts to reform the energy sector and tighten the budget have pleased markets, is struggling to elect an ally after corruption scandals, resurgent gang violence and weak growth have undermined the ruling party's credibility.

Rival Andrés Manuel López Obrador has been leading polls, raising concerns his nationalist platform could stoke tensions with Trump's administration. Expectations he could turn his back on austerity could threaten the outlook for lower interest rates.

Obrador "has committed to acting with fiscal responsibility if he wins but we find it hard to reconcile some of his proposals (doubling pensions, free college education, subsidizing unemployed youth, raising the minimum wage) with a fiscally conservative stance," economists at Itaú Unibanco wrote.

(For other stories from the Reuters global long-term economic outlook polls package:)

(Reporting by Bruno Federowski; Additional reporting by Miguel Angel Gutierrez in Mexico City, Hernan Nessi in Buenos Aires, Nelson Bocanegra in Bogota, Ursula Scollo in Lima and Felipe Iturrieta in Santiago; Editing by Meredith Mazzilli)