Nearshore Americas

It’s Official: Brazil has Fifth Largest Economy in World Soaring Over Britain and France

Brazil has overtaken Britain and France to become the fifth largest economy in the world after reporting 7.5 per cent economic growth in 2010 – the fastest rate since 1986, finance minister Guido Mantega said.

Latin America’s biggest economy grew last year on the back of consumer credit, investment and a government stimulus package but was showing signs of moderating amid slower economic growth in the fourth quarter.

“Looking at the international scenario, Brazil was ranked third in the world in relation to [the pace of] economic growth and it is the fifth [largest] economy when we consider the G20 countries,” Mr Mantega said on Thursday.

After a brief recession during the world economic crisis, the government ramped up its fiscal spending in 2009 and 2010 to help the economy recover and prepare the way for an election last year that swept the government of new President Dilma Rousseff to power.

That helped push gross domestic product to R$3,675bn ($2,215bn) last year, a level that Mr Mantega said made it the world’s fifth biggest, up from about eighth previously.

However, Brazil is struggling to sustain rapid growth owing to its creaking infrastructure, convoluted tax system and labour constraints, leading to concerns of rising inflation.

The inflation rate touched 6.08 per cent in the 12 months to mid-February – just short of the upper limit of the central bank’s target of 4.5 per cent, plus or minus 2 per cent.

The central bank on Wednesday night tightened its benchmark Selic interest rate by another 50 basis points to 11.75 per cent, the second increase this year. The country has the highest real interest rates – rates adjusted for inflation – of any large economy. The market will continue to bet that interest rates will stay high in the near-term, economists believe.

“We have a clear battle here between central bank and market players. This will last until we see inflation coming down and growth showing clearer signs of moderation,” said Diego Donadio, a Latin America strategist at BNP Paribas in São Paulo.

Mr Mantega said Brazil’s economic growth would moderate this year to 4.5-5 per cent as the government downsized its planned 2011 budget by R$50bn.

The government would also reduce Treasury lending to the state development bank, the BNDES, to about R$55bn from R$80bn in 2010 and R$100bn in 2009. Lending by the BNDES was a big contributor to strong economic growth in the past two years.

“We are reducing the resources of the BNDES to encourage the private sector to finance investments in Brazil,” Mr Mantega said.

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Economists said there was evidence that Brazil’s economy started slowing in the final quarter of 2010, expanding 0.7 per cent against the previous three months, or 5 per cent against a year earlier.

Neil Shearing, senior emerging markets economist with Capital Economics, said growth was becoming uneven, with private consumption rising an annualised 10 per cent in the fourth quarter while fixed income investment and exports under-performed.

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Kirk Laughlin

Kirk Laughlin is an award-winning editor and subject expert in information technology and offshore BPO/ contact center strategies.

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