Brazil Overtakes UK, Looks Forward to 2012

| Jan. 5, 2012 |

Published by Minyanville

Brazil ended 2011 with a bang. The Latin American giant overtook the UK to become the world’s sixth-largest economy, based on GDP figures from the London-based Centre for Economics and Business Research (or CEBR).

The news comes in the wake of China overtaking Japan earlier last year and predictions that Russia and India are to usurp Italy later this year. The CEBR expects the four BRIC nations—Brazil, Russia, India, and China—to hold four of the top six spots in the table, with the US and Japan in the remaining seats.

The Financial Times points out, however, that there is much to be done. All four BRIC nations are a long way behind when it comes to GDP per capita, Brazil around the 50th position in that race, according to World Bank figures.

John Paul Rathbone of the London paper also pointed out recently that the BRIC term “never sat that comfortably with anyone,” and perhaps the only real link between them is the countries’ immense size—reflected in the much lower "per capita" figures.

Still, Brazil’s President Dilma Rousseff will be keen to be edging in among the big boys as she celebrates her first year in power, despite the fact that many will attribute the news to her predecessor, the immensely popular President Luiz Inácio Lula da Silva.

Lula’s term ended with 7.5% GDP growth in 2010, which is likely to have fallen to a more restrained—though still impressive—3% last year. This, points out Paulo Sotero, director of the Brazil Institute at the Woodrow Wilson International Center, is lower even than authorities were predicting in November.

“Among the factors behind this were Europe's deepening crisis, continued economic sluggishness in the US, the declining competitiveness of Brazilian businesses and the need to fight rising inflation,” Sotero writes for the BBC.

Looking forward, Brazil is hoping for 3.5% growth in 2012, though Rousseff is perhaps overly confident in hoping for figures as high as 5%. The real issue is inflation. Brazil’s 2011 figures have yet to be revealed; however, a Central Bank survey of 100 analysts and economists reveals an average prediction of 6.54%—higher than the upper limit of the government’s target of 6.5%.

If the prediction is confirmed by official figures to be released on Friday, it would make 2011 the first year since 2003 that authorities have missed their target. Central Bank President Alexandre Tombini will be forced to write an open letter explaining what went wrong. This would be a “damaging blow to Tombini’s reputation and investor confidence in a country that was once torn apart by hyperinflation,” writes Samantha Pearson in the Financial Times.

Brazil’s interest rate has reflected the country’s fight against inflation, hitting a high last year of 12.5% before a shock decision—now seemingly ratified—to pull the figure back down to 11%. In this month’s policy meeting to be held on the January 17 and 18, analysts are expecting the rate to be cut further to 10.5%.

“Economists are seeing that economic activity in 2012 won’t be as great as previously forecast, and that will affect inflation,” Andre Perfeito, chief economist at Sao Paulo-based Gradual Investimentos, told Bloomberg. The third quarter of last year saw expansion at its slowest in two and a half years.

Despite some problems, Rousseff enters her second year in power with incredibly high popularity ratings of 72%. Six ministers resigned through corruption allegations last year, and while critics may see this as indicative of corruption in Rousseff's own government, her supporters claim that she is weeding it out.

“Having ministers and senior officials accused of corruption is no surprise to Brazilians,” writes Sotero. “Seeing them lose their jobs, one after the other, certainly is.”

Despite the popular success, the resignations caused division among Rousseff’s coalition, and there are fears that political appointments will be made to placate concerned allies.

Another contentious topic is spending cuts to the tune of $32 billion in 2012. Congress was hoping for around half of that in order to fight municipal elections later this year, and public servants have long been demanding salary increases.

Military Contracts

Embraer (ERJ) has won its first contract with the US Air Force to build counterinsurgency aircraft, in a deal worth $355 million. The Brazilian manufacturer will provide 20 Super Tucano light attack aircraft as well as support services for missions primarily in Afghanistan.