“After two years in Washington, I often long for the realism and sincerity of Hollywood.” - Fred Thompson
In these times of economic downturn there is a discussion of negative GDP for the developed world while some countries like China are expected to have a positive growth of 8% and India is slated to have a growth of 6.6% as per their respective governments. Assuming that we will apply the same yardsticks to both sets of countries, it is quite difficult to imagine such a contrast. I would like to explain why.
GDP has been described as the Gross Domestic Product of a country and is calculated on a year on year basis. The most common method is the expenditure method. I would like to quote 2 sources for this:
“The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports” - http://www.investopedia.com/ask/answers/199.asp
“GDP = consumption + gross investment + government spending + (exports − imports), or, GDP = C + I + G + (X − M)” http://en.wikipedia.org/wiki/Gross_domestic_product
In these times of economic downturn there is a discussion of negative GDP for the developed world while some countries like China are expected to have a positive growth of 8% and India is slated to have a growth of 6.6% as per their respective governments. Assuming that we will apply the same yardsticks to both sets of countries, it is quite difficult to imagine such a contrast. I would like to explain why.
GDP has been described as the Gross Domestic Product of a country and is calculated on a year on year basis. The most common method is the expenditure method. I would like to quote 2 sources for this:
“The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports” - http://www.investopedia.com/ask/answers/199.asp
“GDP = consumption + gross investment + government spending + (exports − imports), or, GDP = C + I + G + (X − M)” http://en.wikipedia.org/wiki/Gross_domestic_product
We should look at each parameter of Consumption, Investment, Government Spending and Net Exports to undertsand the actual picture.
Consumption
With collapsing economies, huge job loses, and tendency to save rather then spend, consumption levels are falling drastically. The unemployment figure in the US has risen to 12.5 million in Feb 09, In China more than 20 million migrant workers have lost jobs, and in India about half a million have lost jobs, but that figure is probably distorted as only 1 in 10 workers in India are in the organized sector. We also see Inflation rates coming down drastically reaching near zero in India, China and the US bolstering the fears of negative consumption.
Investment
Global FDI inflows declined 21 percent last year to 1.4 trillion U.S. dollars because of the negative impacts of the global financial crisis and its economic aftermath, which was likely to further contract in 2009, according to the United Nations Conference on Trade and Development. China in fact saw a decrease of about 21% in the 1st 2 months of 2009. Internal Investments have also fallen with projects shelved, expansions halted.
Government Spending
This is the only bright spot on the GDP parameters, but whatever figures for stimulus packages are being thrown around have too many ifs and busts. Chin has talked of $ 585 Billion plan, but it is suggested that this may be spent over the next 5 years, India’s government spending would remain clouded till the end of the elections in May, and then the actual figures may come out.
Net Exports
Exports have nosedived to such an extent that figures of 30-40% reduction is the norm. While China is dependent on Net Exports (Exports – Imports) at 7% of GDP, India has a negative Net Exports. (http://sunilmohal.blogspot.com/2009/01/effects-of-bric-on-world-economy.html)
There is a steep trend down on all parameters of GDP, so the figures of GDP of 8% for China and 6.6% for India seem to be based on hope rather then reality.
2 comments:
The Elections are a big spend both by the goverment and the aspirants, thier parties and supporters.... that adds to our GDP ??? So in a wiered way the elections are making it look better for us.
Capitulation of Wall Street in September and October that we missed the equally important collapse of China's economic boom. Maybe we are now so distracted by the proof of China's capitulation — Thursday's gross domestic product numbers — that we're missing the first signs of recovery.
Exports, the first engine of China's three-engine economy, will be blowing smoke for however long it takes the rich world to begin to consume again. But it could be worse. China's (low-cost) exports fell 3 per cent in the year to December while Japan's (high-tech) exports plunged 35 per cent. What matters for GDP growth is net exports — exports minus imports — and China's net exports are growing because imports are collapsing.
Consumption is the second and structurally weakest engine of the Chinese economy. The problem is not that Chinese households save too much, as is often asserted, but that they have too little income in the first place. China under the Communist Party is rigged towards "insiders" so that that there isn't much left for everybody else.
China has to lift consumption by raising household income if its economy is to continue on a high-growth path.
Construction and heavy industry is the third and most powerful engine of China's economy. These developers and steel makers can make and break the Australian economy, at least in the short term, and they were at the front of China's economic train when it crashed.
Steel production fell a stunning 17 per cent in the year to October. Production of other resource-intensive products like cement and aluminium also collapsed, leading electricity generation to fall 10 per cent in the year to November.
Chinese economy had failed to grow at all in the December quarter, China's National Bureau of Statistics released industrial production figures for the year to December. The data had turned from abominable to merely ugly.
The decline in steel production had moderated from negative 17 per cent to negative 10, electricity production improved from minus 10 to minus 8 and cement production was accelerating. It was a far cry from the double digit growth of the previous five years but enough to suggest the bottom in Chinese commodities demand is already behind us.
When steel makers and other materials suppliers had seen prices falling, they frantically liquidated huge stockpiles, sending prices down further and forcing production closures. That process is nearly complete.
The central government has turned on all the fiscal and monetary taps and put its pro-consumer "harmonious society" rhetoric to one side.
Companies have been excused from all manner of regulations — environmental, minimum wage, pensions, insolvency — while local governments and well-connected enterprises have been given the green light and the finance to build almost anything they like.
Some of the trillions in government-endorsed investment will leave a legacy of better transport, cleaner water and more affordable housing.
Some of it will be remembered for corruption and cronyism, building things that nobody needs, destroying what's left of the environment, exacerbating income inequality and making China's economic and social imbalances worse.
But as a short-term macro-economic fix, it seems to be working. The Government's mammoth stimulus package plus the bottoming of the inventory cycle means Chinese commodities demand will be stronger this year than the market expects. It's not out of the question that Chinese construction will lead global reflation.
The challenge will be in two or three years, when the Chinese consumer will be required to fill the export vacuum.
The policy of overcoming existing imbalances by making them bigger requires a credible exit strategy. The risk of a double-dip Chinese recession is real
India
India’s gross domestic product (GDP) growth will slow dramatically to 6.25% in the fiscal year to March, and to 5.25% in the following year. This is well below the 9% growth in the year to March 2008 and even lower than the government’s prediction of 7.1% growth in 2008-09.
The average growth in the first three quarters of the fiscal year was 6.9%. This effectively means the economy to grow only 4.4% in the last quarter.
Even though it government’s stimulus packages might just rescue the economy, the fund cautioned that a further expansion of the country’s fiscal deficit would spell trouble.
“The high public debt thus constrains the government’s possible actions. Nevertheless, if the economy deteriorates further, there are ways to support growth without putting the medium-term fiscal objective at risk. . “The trick is to ensure that medium-term debt sustainability is safeguarded through fiscal reforms.”
corporate investment, a major growth driver in recent years, would slow because of “weakening profitability and confidence, and tightening of financing conditions from foreign and non-bank sources”. WE CAN expects headline inflation based on the Wholesale Price Index to average 2% in 2009-10 from a projected 8.8% average for this fiscal. Wholesale inflation eased to 2.43% in the week ended 28 February, the lowest in six years.
The third quarter GDP data is expected to be revised upward, especially that of the farm sector.”
“swift and comprehensive policy response” by the Indian government, adding that “monetary and structural policies” will have to continue to carry most of the burden of adjustment, given the high public debt to GDP ratio, which is currently running above 80%.
While some saw scope for further monetary easing in the light of the projected decline in inflationary pressures, others saw merit in the wait-and-see approach, given the highly uncertain economic environment.
view of the falling international crude oil prices.
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