In 2001 Goldman Sachs issued an economic paper titled " The World Needs Better Economic BRICs." Jim O'Neill, Goldman's Chief Global Economist, first introduced the now widely-used BRIC acronym for the emerging economic countries of Brazil, Russia, India and China. The original paper and subsequent reports argue that these four nations could become the most important economies over the next 40 years, with China and India as the dominant global suppliers of manufactured goods and services and Brazil and Russia as the most important suppliers of commodities. All together, the BRICs include more than 25 percent of the world's land mass and 40 percent of the world's population. And with their decision to have their own particular brand of capitalism, BRICs will have a growing influence on global economics.
Numbers Reflect BRIC Growth
Over the years, many of the predictions have exceeded expectations. Since 2007, these nations have contributed 40 percent of global growth. If trends continue in terms of accumulated wealth, the BRIC nations combined will overtake the U.S. by 2018. In terms of economic size, Brazil's economy will be larger than Italy's by 2020; India and Russia will individually be larger than Spain, Canada or Italy. According to many observers, these nations could account for almost 50 percent of global GDP in just 10 years.The BRIC nations have also increased their share of global output. China exceeded Germany in 2007 and over took Japan this past July. Goldman Sachs now predicts the BRICs could become as big as the G7 by 2032. Naturally, the equity market reflects the BRICs dominance as well.Since 2000, the Russian traded index raised its value by an amazing 884 percent, followed by China (610 percent), the BSE in India (319 percent), and the Bovespa in Brazil (294 percent).
Recently, China has clearly attracted most of the headline news and accounts for about two-thirds of the BRIC economic numbers. Even though India and Russia also are interesting stories, this week I would like to focus on the B in the BRIC.
Brazil's Future Looks Bright
Brazil is the largest country in South America and the fifth largest in the world in terms of square footage. With a population near 200 million, Brazil's economy has grown to be the largest in South America and is ranked eighth in terms of nominal GDP. Brazil's success can be directly related to its supply and the world's demand for agricultural goods and natural resources, particular iron ore. Manufacturing — mostly automobiles, aircraft, electronics and chemicals — makes up over 25 percent of Brazil's GDP. In addition, Brazil has developed its own oil industry and now has become self-sufficient for its energy needs.
After a slight contraction in GDP last year, Brazil has bounced back after the global meltdown. Last week, the government statistics agency known as Instituto Brasileiro de Geografia e Estatística (IBGE) announced that Brazil's economy grew almost 9 per percent annualized in the second quarter compared to the same period a year earlier. Strong domestic investment was credited for most of the performance. For the first six months of this year, the economy grew by almost over 8 percent compared to the first half of 2009. According to Finance Minister Mantega, it is predicted GDP will expand at least 7 percent for the remainder of 2010, making 2010 Brazil's best performance period in 24 years. Capital spending was up over 26 percent in Q2 compared to the same period last year, as companies are increasing production to meet stronger internal demand. Consumer demand rose 0.8 percent from the previous quarter, while government spending rose 2.1 percent. Investment expanded 2.4 percent from the previous quarter and 26.5 percent from a year ago, the biggest jump since the numbers began to be tracked in 1996. In addition, unemployment has dropped to 6.9 percent, down from over 8 percent a year ago and could fall to 5 or 6 percent over the next couple of years. Meanwhile, imports were up 39 percent as consumers took advantage of a strong real (BRL) (see chart) to travel and purchase products from abroad.
Source: Bloomberg, SVB Financial Group
With such success, there are concerns of a repeat of the past for Brazilians, who endured bouts of hyper-inflation in the recent past of nearly 17 percent in 2003. Today, the largest economic growth in almost two decades is beginning to produce shortages and price increases. Inflation, last reported over 6 percent, is above the government's target of 4.5 percent. Central Bank President Henrique Meirelles has raised the SELIC (Brazil's overnight bank lending rate) three times this year, to 10.75 percent. He also said that the economy will remain hot in the third quarter. It is forecasted by some that the central bank will need to resume raising interest rates after the presidential elections in October. According to interest rate futures, Brazil's central bank overnight lending rate could go as high as 12 percent. Finally, Brazil faces an uncertain global economy asits success is still tied to global trade. With a risk that double-dip recession in Europe and a slowdown in the U.S., demand for Brazil's resources could shrink. Until then, the bottom line is that Brazil's fundamentals look good.The currency should remain strong as capital inflow continues, BRL interest rates remain attractive and Brazil keeps its economic house in order.
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