Brazil's economy overtakes UK to become world's sixth largest

Figures show Brazilian economy rose 2.7% last year compared with the UK's 0.8% – but per capita income remains a third of the UK's
Guido Mantega
Brazil's finance minister, Guido Mantega, at a news conference in Brasilia about his country's GDP, which rose 2.7% last year. Photograph: Ueslei Marcelino/Reuters

Brazil has claimed the UK's spot as the world's sixth largest economy after official figures showed its economy rose 2.7% last year against the UK's 0.8%. France remains in fifth place behind Germany, Japan, China and the US.

The per capita income of Brazilians remains less than a third of that enjoyed in the UK at $11,000 (£7,000) per head, but the situation is improving all the time while western economies largely stagnate.

The economic thinktank, the CEBR, predicted last year that Brazil would climb above the UK in 2012 and would itself be leapfrogged by India and Russia by 2020.

Tim Ohlenburg, of the CEBR, said the high value of Brazil's currency was a big factor in the country's burgeoning wealth.

"It is a bigger economy when measured at current market exchange rates," he said.

Brazil's dash for growth can be traced back to the mid 1990s when a string of privatisations ended the state's dominance of commercial life. China became a big customer, with a particular liking for soya beans and iron ore. The US also began to invest heavily in the country.

Top of the list of economic attractions is agriculture and the processing of foodstuffs, which account for about a quarter of Brazilian GDP and 36% of exports. In the last 20 years it has become the world's largest producer of sugarcane, coffee, tropical fruits, and has the world's largest commercial cattle herd (50% larger than that of the US) at 170m animals, according to official figures.

Oil is expected to become the next big commodity for export, especially if a way can be found to drill safely in the Atlantic's deep waters. Reserves are believed to equal those shared by Norway and the UK in the North Sea.

President Luiz Inácio Lula da Silva brought in social policies to raise the incomes of Brazil's poorest after his election in 2002. Dilma Rousseff, his handpicked Workers' party successor, oversees a country where most people are considered middle class.

Rousseff is considered a strong advocate for transparency in government, which is code for tackling corruption. Within the first year of her government, several cabinet ministers resigned after accusations of graft in awarding contracts.

Yet bribery and the politicisation of the civil service continue to cause problems, with many overseas companies complaining that contracts are only signed and completed after dollars have greased many palms.

Lula gave workers the right to sit on pension boards as a way for the low paid to exercise control over the country's growing commercial and industrial businesses. But the project has failed to realise much in the way of action and despite further labour protections, a small group of wealthy families own most of Brazil's major banks and companies.

Still, the combination of huge natural resources and significant growth in manufacturing and services has meant Brazil is one of the most attractive places for the world's super rich, and that includes corporations, to park their money.

One of the knock-on effects has been to push up the value of the real, which has appreciated 40% since the financial crisis of 2008.

For Brazil's wealthy it is a boon because it increases their wealth and foreign buying power. It has also allowed the government to embark on a spending spree.

But for exporters it is a huge headache. The long-serving finance minister, Guido Mantega, has railed against the rising value of the currency, which he knows pushes up the price of exports and could put whole industries out of business. Should the commodity boom end, the high value of the real could mean the country has little in the way of business to fall back on.

Mantega blames the US, UK and continental Europe for driving investors towards Brazil. He argues that quantitative easing schemes have cheapened the world's major currencies, leaving his as one of the few attractive ones around.

However, he is trapped because domestic savings are not sufficient to sustain long-term high growth rates. That means Brazil must continue to attract foreign investment, especially as the government plans to cover the cost of oil extraction, nuclear power, and other infrastructure sectors over the next few years.

This article was amended on 8 March 2012. The original sub-heading said that figures show Brazilian economy rose 2.7% last year compared with the UK's 0.8% – but per capita income remains a third less. This has been corrected. In addition, the text stated that President Lula was elected in 2001. This has also been corrected.