Brazil has overtaken the UK as the world's sixth largest economy, an economic research group has said.


The Centre for Economics and Business Research (CEBR) said its latest World Economic League Table showed Asian countries moving up and European countries falling back.


BBC


Interesting times.

You may regard it as "European countries falling back" while it in reality is rather a "return to normalcy"




The figures on the right side to me are what I regard as normal while the present figures, as correct as they are, are strange

Brazil is labeled as the "next great global economy", always has been and always will be

If you read geopolitical books from the 19th century they all talk about how corrupt and horrid the United States is (was) and how the best place to be is in Brazil and Argentina. They were labeled as "The next great super-powers".

Once this commodity bull run wares off, they will take three or four steps back on this list.

Geopolitical books of the 19th and early 20th Century here in Europe talked about China (Sven Hedin -- Asien marschiert) as THE superpower of the future. Dagobert von Mikusch in about 1930 in his book about Mustafa Kemal Pasha forecast that the Republic of Turkey in the future would rise in importance. But nobody then said anything thelike about Latin America.

HOWEVER, Brasil is well enroute now to get up, and so, the authors of the books you read were not so wrong after all. Look at civil aviation. Nobody in the 1950ies, 60ies and 70ies, when talking about civil aircraft manufacturing mentioned Brasil. Now, Embraer is a definite market factor. Rekkof, the company who took over the "debris" of Fokker now is going ahead with a sizeable production site for a renewed and updated Fokker 100 in Brazil.

Look at the performance of industries in China and India. Simply not on the map in the 1960ies.

I however DETEST the use of the word "superpower" as those "treshold countries" just like Japan may get into a decent position economy-wise, but a superpower also has strategic and political clout all over the globe. In case of Germany, Mrs Merkel has moved Germany up to dominance in political terms, but nobody inside (I hope so) and outside Germany wants to see the German ..... dominating militarily (again ? ). China may gradually develop worldwide superpower-status, which is a rather doubtful thing and not really amusing

Russia surpassing Brazil by 2020? I highly doubt it (скажу без обиды - no offense).

I would argue that Russia in the early 2010s is comparable to Brazil in the early 1980s (hence a 30 year difference in economic and political development). Education and literacy is another matter.

Brazil back then had an authoritarian regime with the military and security services monopolizing political power and the bulk of key economic sectors being either majority managed or fully monopolized by the state (EMBRAER was state-owned back then, Petrobras was a monopoly, so was Vale, the Ethanol industry, Telecommunications, the automotive industry was so protected from foreign competition back then that Collor called Brazilian cars "carousels" because they were crap, etc...). Although the country experienced an economic miracle during the 1970s at the height of authoritarianism (similar to Russia in the 2000s), the country stagnated in the 1980s as the political and economic model had exhausted its ability to deliver growth and development.

Brazil democratized, held privatizations, reformed its economy and opened up in the 1990s. This allowed the country to grow phenomenally in the 2000s and will continue to allow the country to expand in the foreseeable future.

If Russia doesn't follow similar steps to democratize loosen the state's role in the economy, it will definitely not overtake Brazil (probably not even India).

I seriously doubt this. Having been to Brasil about 15 times in the past 7-8 years I've really seen the changes. The country is different. There is a great vibe and excitement and the opportunities available to people. Lula had it right when he said there is not a shortage of food in the world, it just happens that now every Brazilian can have 3 meals so there are more mouths to feed. Of course this statement is very political but it there is now a much bigger middle class in Brasil then there was 10-15 years ago and the purchasing power has risen immensely. In next few years they are organizing Olympics and the World Cup and these will certainly help to improve infrastructure.

The biggest problem will be how to tackle the corruption which is still everywhere

Hey, Im not saying they havent made inroads. What I am saying is that Brazil is a high tax socialist State. Ask anyone in the government. They will tell you the same thing. At our conference last Sept we had the minister of trade and the ambassador both speak and lay out the numbers.

If industrial commodities were to drop in value by 40% the government shortfalls would be so large that they would have quadruple their borrowings.

Thats not stable. Thats what Greece has......!

What about this drought right now? Do you really think Argentina can keep exporting that much grain to Brazil? Brazil has a negative grain trade balance. If this drought today doesnt turn its self around soon they will be in deep shiit.

Brazil is incredibly rich, but has an crappy governmental system that is based on ever increasing tax revenues from commodity prices. In order to cover the shortfalls from lower commodity prices they will have to raise taxs to 70%....! Seventy Percent......... Do the math. Thats not a good thing.

what you said Brazil will fall 3-4 places down meaning Russia, France, Italy would surpass them - do you really believe this? Each one of these have their own issues which I believe are much worse than what Brazil has. In addition there doesn't seem to be any light at the end of the tunnel for those countries.... The projection above is less than 10 years from now. If I were a betting man, my money would definitely be in Brazil and not in Russia or Italy or France or even the UK.

I understand what you are saying. Demographically I am on board. You are correct. But what I am saying is, as a person who is very very interested in Investing in Brazil, there is simply a better time to do it. Brazil is a bit of a mean reverting economy.

So lets say Italy and France collapse. We have made most of our money in 2010 and 2011 on betting against Europe. So I am a firm believer that the pension shortfalls will destroy them.

So what happens when these guys get smacked? Consumption declines. Well then demand for raw materials will collapse. When that happens the price of commodities drops in real terms. The GDP is Brazil and Russia have a huge Beta compared to European GDP. They always have except for when commodity prices are at the top range of their inflation adjusted prices (where they have been for the last 7 years).

China bailed them out last time. But now China has the largest pension shortfall on the planet, the largest elderly population, will be out of water in 7 years, and needs very desperately to devalue its currency in order to keep growing its manufacturing base. The FAI is at 60% of GDP...... So starting this year the labor market will have turned. Thats why the Chinese are in such a rush to stockpile USD's. They cant tax retired people! With so many Chinese retiring fixed asset investment will obviously have to come down.

So its highly unlikely China can save the world this time. If the beauracracy in India were to ever cease it might be able to help. But the paper-work alone to get a few diamonds into the country takes weeks. Buying a house (which we have been trying to do for 6 years!!!!!!!!!) takes months of negotiating and when the price is finally agreed upon, they dont call you for two weeks and then raise the asking price again...... If India were to save the world by buying all of these commodities its trade balance would be so negative that the government would have to shut the country in from the rest of the world for a couple of years.

So if you have a good reason why commodity prices will keep rising, I would love to hear it. If not? Well Brazil will likely get hit very hard for several years until it changes governmental systems a few times. Thats when I would prefer to invest.

a bit gloomy but I see what you're saying. I don't think commodities will fall 40% (but i am no expert). Some commodities will certainly fall but others simply won't. Things like wheat, oil, gold, cattle will continue to rise. All you need is one hurricane, one tsunami, one earthquake and things change completely. The big advantage Brazil has (in my eyes) is they produce a lot of everything: oil, corn, hydro power, wood, gold, etc. they don't rely on iron or cement for Chinese constructions (although they also have a lot of iron)

As you said its downfall is the beauracracy, corruption, red tape....

Not wheat, but soybeans and corn, yes.... They import most of their wheat from Argentina.

The biggest threat to Brazil is drought or a freeze though. We havent had a good one since 1974.

Like I said, Im all about investing in Brazil. But a good example of taxs in the country is that of a toyota Corolla. It is the basic lower-middle class car. Its astronomically expensive in Brazil. See attached.

The taxs are the highest of any emerging market AND they have the VERY LOWEST public investment in the world, save for Argentina. They invest 7% of their money. The other 93% goes toward social welfare programs!!!!

By 2020 their Pension Benefits as a % of GDP will be bigger than that of Greece!!!!!

Brazil does have high taxes, unfortunate corruption and high social spending programs (which can be be beneficial on creating a consumer middle class to drive further economic growth).

However, the economy and it's trading partners are highly diverse. This is not a Russia or a Saudi Arabia where a specific commodity (oil & gas) is the lifeline of the economy, accounting for more than 50% of exports and budget revenues).

Interruption in grain supplies from Argentina (not a top 4 product btw) can easily be mitigated by seeking alternative sources from the US, Russia, etc...

Your corolla example is a good one but only applicable to products not manufactured or transformed in Brazil. If the same car is manufactured in Brazil the cost structure is much different. The Gol (or Golf) is a good example and this is why it has been successful in Brazil.

Brazil is a protectionist economy which is also not positive for foreign investors but on the other hand the social programs have allowed to create the middle class that is currently thriving. This is an inheritance of the Lula government

YESSSS and thats precisely the problem. No one in the country invests in the manufacturing base. They have the lowest manufacturing investment in the emerging world. This is partly due to the commodity exporter curse of an increasing currency value. So during times of strong currency they dont expand manufacturing at all. They prefer to import stuff. CS put out a great note last year on how over the past decade manufacturing has only increased by 28%! During that period credit growth exploded though. Thus the money is being used to consume imported goods. Retail Industrial Production was even larger than Manufacturing. Thats not normally a sign of health. Thats what Mexico saw in 1994.

But taxs are even high on local stuff too. Most Brazilians who have successful businesses move much of their money offshore. Thats why Wealth Management salesmen love the place. No one wants to re-invest their money into the country. Brazil collapsed in 1982, 1994, and 1998. People who make money are weary of this cyclical kind of economy. Also, Brazil has had 2 "resets" in the past 20 years. Thats when they confiscate all of the foreign currency of private citizens and re-issue funny money in its place. Then put the stolen FX reserves to use in socialist programs.

Thats why investors pussyfoot the place.

I know two Brazilians with very good MBAs who have returned to Brazil recently (one from CH and one from the USA) because of work prospects, something which was unimaginable a decade ago.

Brazil certainly has the potential to become a powerhouse, but whether it does or not is questionable due to all the points above. It is also trying to gain influence on the world political stage.

On the other hand the UK is losing political influence and struggling economically, that's for sure.

Economists are often wrong for a variety of reasons but I think in this case Brazil up and UK down is a sure thing.