Reuters predicts recovery only in the second half of the year.

By Luciana Otoni and Alonso Soto

BRASILIA, May 6 (Reuters) - The government knows that the Brazilian economy will not recover strongly until June and that inflation will remain high, keeping President Dilma Rousseff's administration vulnerable to criticism, assessed a key member of the economic team.

The unfavorable economic situation, according to the source, led to the anticipation of the 2014 election debate and further complicated the management of economic policy.

"It's a delicate moment in President Dilma's administration," the source told Reuters, preferring to remain anonymous so he could speak more openly about the economy.

The reversal of the low growth and pessimistic outlook for the economy will begin in July, when the government starts to implement infrastructure auctions, such as for highways and airports.

"In July, we're going to put one auction after another out there. Auctions for highways and airports, and this, along with the fuller effects of the tax breaks already adopted, will improve the mood regarding the Brazilian economy."

According to the government's schedule, auctions for the concession of nine lots of federal highways are planned to begin in July, as well as the launch of the concession notices for the airports of Confins, in Minas Gerais, and Galeão, in Rio de Janeiro.

Like other members of the economic team, he believes that the Gross Domestic Product (GDP) will gradually recover this year and inflation will decline, but still without converging to the target of 4,5 percent per year.

To boost the economy, in addition to the auctions, the government is counting on the effect of the approximately 70 billion reais in tax breaks already announced for this year.

According to the source, the Ministry of Finance is not expected to adopt any new significant tax breaks this year, only specific tax reductions with little impact.

Generally, economists believe that Brazil's GDP will grow by 3 percent this year, but there are already more pessimistic assessments, such as that of Bradesco, which reduced its GDP growth forecast to 2,8 percent in 2013, compared to 3,5 percent previously.

In March, inflation exceeded the upper limit of the target, which is 4,5 percent with a margin of two percentage points above or below, with the IPCA (Brazilian consumer price index) registering a 6,59 percent increase over the past 12 months.

The surge in prices led the Central Bank to raise the Selic rate by 0,25 percentage points, to 7,50 percent per year, in mid-April to curb consumption and prices, a delicate move at a time when the economy is not showing more robust signs of recovery.

Industrial production, for example, rose by only 0,7 percent in March compared to February, below expectations and indicating an uncertain scenario for the industrial sector and for economic activity.

POLITICAL FRAGILITY

According to the source, while up until 2012 the difficulties were focused solely on making the economy grow at a faster pace, this year those challenges have increased with widespread inflation and open criticism from the president's potential political adversaries regarding her economic model.

"This is a situation of great concern for the government, and we have to be very careful with our communication," the source stated, adding that the government must respond to the criticism without creating noise in the market.

Questions about Dilma's ability to grow the economy and control prices have become recurrent in recent weeks, especially coming from her potential opponents in next year's presidential elections.

Both Senator Aécio Neves (PSDB-MG) and the governor of Pernambuco, Eduardo Campos (PSB-PE), have attacked the government with harsh criticism, such as claiming it is lenient on inflation. These attacks became even more evident last Wednesday, when the opposition turned Labor Day into a day of protest against inflation and the loss of purchasing power for families.

"It was agreed that, to avoid misunderstandings, only Mantega (Finance Minister Guido Mantega) will speak about macroeconomics. And Mantega asked his secretaries to be extra careful in their communication," he informed.

Even with this agreement, the previous week began tensely for the economic sector, which was bothered by the interview given by the Treasury Secretary, Arno Augustin, to the newspaper Valor Econômico, stating that the primary surplus will be a variable of the economy and no longer of the public debt, reinforcing the message that the government will not pursue the full 2013 target of 155,9 billion reais.

"That interview caused discomfort. The problem wasn't what he said, but the context, amidst the criticism of the government," commented the source.