Brazil's economy ground to a halt in the third quarter as the euro zone debt crisis dragged on global growth and the country's indebted consumers retreated after nearly three years of buoyant spending.
Latin America's biggest economy posted zero growth from the second quarter, the government said on Tuesday, a sharp slowdown this year from breakneck annual growth of 7.5 percent in 2010 that far outstripped developed nations.
The third-quarter slowdown hit sectors that had been bright spots in Brazil, with consumer spending -- which makes up about 60 percent of Brazil's economy -- dropping for the first time since the end of 2008.
Capital spending -- considered a bellwether for future growth -- fell, as did the industrial sector, which has struggled for much of this year partly because of Brazil's strong currency.
The most shocking aspect of the number was the fact that all demand components contracted, said Mauricio Rosal, chief economist at Raymond James & Associates.
The reversal ... is very worrisome, and the worst is that there's not much that can be done about it -- we depend on a solution to the problems in Europe.
The sputtering growth comes as Europe flirts with recession and China's economy also shows signs of cooling.
Brazil is expected to grow about 3 percent this year - better than crisis-hit Europe but well behind the pace of other big emerging markets such as India and China.
The government said the slowdown was temporary, predicting that growth would pick up in the fourth quarter and in 2012.
We have the situation under control, in contrast to other countries, where growth is falling because of a fundamental lack of market, Finance Minister Guido Mantega said in a news conference.
The government forecasts for next year are around 4 to 5 percent, he added. We're in the right shape for that.
The zero growth was in line with a Reuters poll of 25 analysts. The economy grew 2.1 percent compared from the year-ago period, IBGE said, below expectations of 2.4 percent in the Reuters poll.
Citing signs of a severe global slowdown, Brazil's central bank has cut interest rates three times since August. President Dilma Rousseff's government also announced a slew of tax breaks last week to support consumption, reprising policies in the wake of the 2008 financial crisis.
But the government, which cut about 50 billion reais (17.8 billion pounds) from this year's budget to tackle stubbornly high inflation, has little room for further fiscal stimulus. The annual inflation rate has been stuck above a 6.5 percent target ceiling since April even as the economy has cooled.
Concerns about overheating also prompted the central bank to hike interest rates five times, by a total of 1.75 percentage points, before it reversed course in August.
STILL VULNERABLE TO TRADE SLOWDOWN
Monthly data from October and November suggest the slowdown is continuing and even deepening as the worsening euro zone crisis hurts demand for Brazil's exports, which are dominated by commodities such as iron ore and soy.
Industrial production figures for October showed factories cut their output for the third straight month.
Export demand was a rare bright spot in Tuesday's data, growing 1.8 percent, helped by weakness in Brazil's currency against the dollar as investors responded to the euro crisis by pulling out of emerging market assets.
But that still marked a slowdown in export growth from 2.3 percent in the previous three months. The huge agriculture sector also grew, expanding 3.2 percent from the previous quarter.
The external sector helped, with growth in the export sector, said Mauricio Nakahodo, an economist with CM Capital Markets. But that ends up being worrying -- having GDP dependent on trade in current conditions, he added, referring to growing worries over fallout from the euro zone crisis.
Adding to the grim tone, Brazil's relatively brisk growth earlier this year was revised down. The IBGE said the economy grew 0.7 percent in the second quarter from the previous three months - down from 0.8 percent - and by 0.8 percent in the first three months, down from 1.2 percent.
Although the country's job market has remained strong, Brazil's consumers appear to be approaching the limit of their credit-fuelled spending spree of recent years. Their spending fell by 0.1 percent in the third quarter from the second.
The industrial sector also shrank, down 0.9 percent in the period, and capital spending fell 0.2 percent.
While the central bank's first of three 50-basis-point rate cuts on August 31 stirred doubts over its strategy, analysts have begun calling central bank head Alexandre Tombini a potential trendsetter as the 17-nation euro zone threatens to dissolve.
Tombini forecast inflation will slow in coming months from its annual pace in mid-November of 6.69 percent, which could give the bank room to cut interest rates further in a bid to support flagging growth.
For the IBGE on third-quarter GDP growth, please see: http://www.ibge.gov.br/home/presidencia/noticias/noticia_visualiza.php?id_noticia=2037&id_pagina=1
(Additional reporting by Luciana Lopez and Guillermo Parra-Bernal in Sao Paulo and Alonso Soto and Tiago Pariz in Brasilia; editing by Stuart Grudgings and Padraic Cassidy)