By Anthony Boadle
BRASILIA (Reuters) - Brazilian President Dilma Rousseff until recently appeared to be cruising towards re-election in October but she now finds herself in a tight race as an already sluggish economy takes a turn for the worse.
Economic growth, slow for most of her term, looks even less promising this year with economists expecting a contraction in the second quarter.
Inflation is running at just over 6.5 percent and employment figures, long one of the bright spots in Latin America's biggest economy, recently began to show trouble. Industrial output has slumped for the last three months and is on track to shrink more the 1 percent this year, prompting some manufacturers to start cutting jobs.
Frustration in Brazil's biggest cities is also mounting. Poor public services and traffic gridlock, both factors that helped lead to mass demonstrations across Brazil last year, make daily life for many an increasingly unbearable slog.
While many Brazilians are still thankful to Rousseff's leftist Workers' Party for two previous terms of sustained economic growth, what had been unflinching support for her government has recently begun to slip.
Rousseff does not have enough votes to win the Oct. 5 election outright, according to figures released by pollster Datafolha on Friday. And her main challenger, centrist Aecio Neves, has narrowed her lead in a likely second-round runoff from 27 percentage points in February to just 4 points, a statistical tie.
A separate poll released Saturday by the Sensus polling institute also shows the election headed to a runoff, with Rousseff and Neves tied in a second round.
The numbers have energized the Neves camp, giving it an array of issues to exploit on the campaign trail.
"Conditions are ripe for an opposition victory - Dilma's rejection numbers, Workers' Party fatigue, the economic downturn and a lack of new policy ideas from the government," Senator Aloysio Nunes, Neves' running mate, told Reuters on Monday.
If Neves can pull off an upset, investors expect a return to the business-friendly policies that paved the way for the economic boom that Brazil enjoyed last decade.
He has pledged to restore Brazil's fiscal credibility by reining in public spending without sacrificing the social welfare programs that are so popular with Rousseff's base.
As they head into intense campaigning for the next two months, both Neves and Eduardo Campos, a dark-horse upstart candidate from another left-leaning party, will focus on the negatives that have begun to rattle the foundations of Rousseff's support.
"Rousseff's worst enemy is not Aecio Neves. It's her own rejection numbers," said Thiago de Aragão, a partner at Arko Advice consultancy in Brasilia. Those numbers, analysts say, mean that many Campos voters, if he gets eliminated in the first round of voting, are likely to turn to Neves in the runoff.
The Datafolha poll showed that the number of Brazilians who say they will never vote for Rousseff is up to 35 percent, double that of Neves, while 29 percent now rate her government bad or terrible, worse than at the peak of last year's protests.
URBAN ANGST
The anger from those protests did not spill over into Brazil's hosting of the recent World Cup football tournament, an event that was widely praised in sporting terms and which did little to harm Rousseff because it unfolded with few of the logistical nightmares that many expected.
Still, the tournament was perceived to go smoothly largely because Brazil declared holidays in host cities around most games, ensuring less of the chaos that regularly cripples Brazil's streets, trains and airports.
As voters refocus on daily issues from which they were distracted because of the World Cup, urban angst could manifest itself at the ballot box.
"Life in Brazil's cities is deteriorating fast and there is a very strong public sentiment that the government is not doing what it should be doing to improve electricity, water, sewage and transport services," said Jose Augusto Guilhon Albuquerque, a political scientist at the University of Sao Paulo.
To make matters worse for Rousseff, the coalition that sustains her government in Congress is tenuous because some smaller parties are angry with her Workers' Party, which routinely balks at requests from allies for key administration posts.
Even if they are nominally on board with her campaign at the national level, many will back other parties in state and mayoral races, fuelling tensions that could further undermine her overall support.
To be sure, Rousseff has some heavy artillery to roll out in the months ahead. In addition to the rich campaign coffers and marketing muscle of the Workers' Party, she will enjoy ample TV time for campaign spots under Brazilian electoral law.
She also enjoys the backing of her mentor and predecessor as president, Luiz Inacio Lula da Silva, a legendary campaigner and still Brazil's most popular politician.
Worried about Rousseff's slide in the polls, Lula has called on her campaign to aggressively tout the reduction in poverty and other social gains that Brazil has seen under the Workers' Party.
During Lula's two terms, the Workers' Party received considerable campaign contributions from some of Brazil's largest businesses, happy with a booming economy and an expanding consumer market.
But Brazil's business class dislikes Rousseff for what they consider her heavy-handed intervention in the economy. Her policies, they argue, have cut profit margins, discouraged investment and made Brazil less competitive.
Though most companies will hedge their bets and contribute financing to all candidates, Brazilian markets have increasingly shown how much they hope for a Rousseff loss. The Bovespa stock index has risen more than 25 percent since mid-March, when Rousseff's popularity first began to weaken.
Neves has struck a chord with investors by pledging to refrain from meddling in the affairs of state-controlled firms like oil giant Petrobras, whose finances have been severely weakened under a Rousseff administration policy that forces the company to sell fuel below market prices.
The election now looks so close that experts in Brazilian politics are holding off predicting an outcome.
"I don't know who will win," said Vera Chaia, a politics professor at Sao Paulo's Catholic University. "Up to a month ago, before the World Cup, I thought she could win. But now it's hard to say."
(Editing by Paulo Prada and Kieran Murray)