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GLOBAL GDP – and its true perspective and value as an ECONOMIC Barometer …

July 2, 2011
Title: GLOBAL GDP
– and its true perspective and value as an ECONOMIC Barometer …
Thought of the Day …
Global Investors uses GDP (Gross Domestic Product) as a barometer for a Nations economic health. How is GDP calculated … who imposes and calculates the variables … are the figures made to look bright and shinny – or are GDP numbers a real and meaningful reflection … all relevant questions when you consider GDP is a big factor in how others see the ECONOMIC RISK and RETURN that attracts off-shore investment …

What is GDP – Explained:


GDP[GROSS DOMESTIC PRODUCT] – can be determined in three ways, all of which should, in principle, give the same result. They are the product (or output) approach, the income approach, and the expenditure approach. The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people’s total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors (“producers,” colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers’ incomes.[4]

Example: the expenditure method:

GDP = private consumption + gross investment + government spending + (exports – imports),

Note: “Gross” means that GDP measures production regardless of the various uses to which that production can be put. Production can be used for immediate consumption, for investment in new fixed assets or inventories, or for replacing depreciated fixed assets. “Domestic” means that GDP measures production that takes place within the country’s borders. In the expenditure-method equation given above, the exports-minus-imports term is necessary in order to null out expenditures on things not produced in the country (imports) and add in things produced but not sold in the country (exports).

Economists (since Keynes) have preferred to split the general consumption term into two parts; private consumption, and public sector (or government) spending. Two advantages of dividing total consumption this way in theoretical macroeconomics are:

  • Private consumption is a central concern of welfare economics. The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption.
  • If separated from endogenous private consumption, government consumption can be treated as exogenous,[citation needed] so that different government spending levels can be considered within a meaningful macroeconomic framework.

Global GDP:


In recent weeks the EYE-BALL GURU spent some time researching the Global GDP data recorded at a very good Economic Data Website called: Trading Economics .com and discovered GOLD so to speak.

The site has every Economic trigger you could ever wish for covering every Nation you would ever want to contemplate investing in. The site has free access and is very easy to navigate and chart data format that goes back 60-70 years for some Nations.

To download or capture the raw data requires a sign-up membership – and monthly subscriptions that is not all that cheap (i.e. $150 p/m) – or a trial membership at $49 p/m to try it out. There are heaps of free data which is excellent for research projects like that which are included in this post.

In tackling this project – a thesis that considers the value of GDP as a true and reflective economic barometer – I have had the belief for some time now – and this belief has become increasingly sceptical in the acceptance of the accuracy and collective summations of economic data and its reporting.

Is it all a monster of a con designed to fuel the Financial Markets?

The total sum of the economic data based around GDP and the global sensitivity to the numbers by Governments, Investors and the like – bear no correlation to what GDP actually represents – and this post will show you why.

There is no real suggesting that the numbers are manufactured or fudged by those responsible for collating the data – just a suggestion that extremes in the variables as is highlight hereto. Are the more sensitive price indicators being subjected to smoothing factors – i.e. seasonal influences calculations – or being rejected and edited out of the summary numbers? All with a purpose to present the numbers as more appealing and less volatile.

In newer and emerging older economies – i.e. Brazil, India, China, Indonesia and Russia and the like – the GDP graphs – [see below] – show a rawness that in many ways is very refreshing – a shunning of INFLATION concerns and a preoccupation to contain growth via Interest Rates for example.

No judgement is made as to whether these charts and the numbers they reflect are as comprehensive in detail and cross-section audited – when compared with the economies of more developed Nations. What is very interesting is that these Nations do have GDP numbers that presents a continuity and demonstrates their economies have high potential to attract off-shore investment interest. The GDP Charts for these Nations appear below: [please click on the Chart to see a larger Image]

Brazil GDP:

The Brazil data dates back to 1995 – and shows an economy prone to peaks and troughs – since 2006 the data showed a healthy and consistent growth near 1.75% until the GFC impact.

Since that period the growth has returned and sits once again around the 1.75%. Stimulus packages introduced as a result of the GFC may have some relationship to this recovery and only future quarterly data will give insight to this.

Brazil – like Australia is experiencing a mining boom based on massive discoveries of oil and mineral reserves. Future prosperity is assured based on the continued resource boom and investment is pouring into infrastructure projects to cope with the export logistics needed to shop and pipe these resources. On face value alone – Brazil’s future GDP growth is expected to rise without Government intervention.

Chart Courtesy of: Trading Economics.com – BRAZIL Click on chart to enlarge.

India GDP:

The Indian chart is a much more robust and positive chart. The data available dates back to 2004 – and clearly shows the entrenched 9% GDP growth both before and post the GFC complications.

The GFC impact was felt but bottomed at +5% levels before rising again to the pre GFC levels of 9%. There has been a dropping off in recent quarters in line with Interest Rate rises introduced by the Central Bank to curb some expected inflationary pressures – and to counter some of the GFC stimulus measures undertaken.

This is clearly an economy where internal consumption is a force that is generating off-shore investment.

Chart Courtesy of: Trading Economics.com – INDIA Click on chart to enlarge.

Other major Nations within the Asian region that are worth noting and also have this robust GDP Growth include China, Russia and Indonesia. There GDP charts appear below:

China GDP:

The chart at left is a modern day GDP miracle in economic terms and activity. There is no Western Economy chart that comes anywhere near this set of numbers for reflecting domestic growth.

The data dates back to 1990 and from a low of 4% GDP growth at that inception – the chart has had highs of 14% and lows of 6% including a mirror dip during the GFC that every other economy suffered. Yet even at the height of the GFC impact – China’s GDP growth still reflected a 6% growth and robustly bounced back to 10% average growth over the last 2+ years.

Recent internal concerns about inflationary pressures has seen rises in Interest Rates and this tightening will hopefully cool the economy. China’s domestic consumption alone can drive its economy for decades to come and if it were to falter – hopes of the Western World avoiding a complete debt induced meltdown may be erased.

Chart Courtesy of: Trading Economics.com – CHINA Click on chart to enlarge.

Russia GDP:

The RUSSIAN chart at left shows similar consistency of growth since 1998 through to the GFC period as does China, India and Indonesia – this is the PUTIN era.

When theGFC hit – the Russian economy also took a hit – it took 4 quarters of data to recover and they again sit comfortably at the 5% range.

Their economy has done well during the resource boom – and with their oil reserves and mineral wealth – notwithstanding the weather extremes they endure to extract the resources – their economy is one of the strongest survivors post GFC.

Perhaps the Russian BEAR will roar again – and prove the USA Cold War efforts to squeeze the Russian economy when oil prices fell to $10 a barrel during the early 80’s – was short sighted and a short term political gain for what the USA is and about to face as their economy begins its own meltdown.

Chart Courtesy of: Trading Economics.com – RUSSIA Click on chart to enlarge.

Indonesia GDP:

The Indonesian GDP chart is an almost mirror image of the China chart except for upper levels of GDP growth – where China was above 10% levels – India averages around 5-6%.

A most notable indicator of just how independent the Indian economy is in many ways – was that all through the GFC crisis- their economy only dropped 1% and quickly rebounded. Their internal consumption rivals China – and is much more advanced in in many ways.

Chart Courtesy of: Trading Economics.com – INDONESIA Click on chart to enlarge.

W ith the exception of the BRAZIL [see larger chart below] – and RUSSIAN charts – – there are no negative quarters through the GFC period or since for China, India or Indonesia. The charts for these Nations reflect rapidly growing economies by western standards. When the Brazil chart is compared in isolation with the Australian GDP chart – [also see below] – a different summary might easily be concluded.

Brazil/Australia GDP:

Charts Courtesy of: Trading Economics.com – BRAZIL Click on chart to enlarge.

Charts Courtesy of: Trading Economics.com – AUSTRALIA Click on charts to enlarge.

The Australian data dates back to 1960 as compared to the Brazilian 1992 commencement date. This makes for the frenzied compressed presentation of the Australian data – but this also more clearly demonstrates and infers the volatility that is in the quarterly GDP numbers. This frenzied structure demonstrating the positive/negative oscillation and constantly formed peaks and troughs – does no elude confidence or a consistency that suggests Australia has a robust economy – but one that goes through booms and busts as frequently as the weather patterns might change.

This would suggest an economy influenced on a quarterly basis by internal and or external factors that are always moderated and being tweaked by RBA/Government interventions or some other factors. Some of those factors might be:

  • Weather patterns and influences –
  • Seasonal adjustments –
  • Currency value – pre and post floating of the A$ on the 12th Dec 1983
  • Commodities prices as pre Resource booms cycles –
  • Domestic public spending – due to one off type stimulus packages – and
  • Changes of Government Policies due to a change of Government and other economic cycles.

One of these factors currently in play is the RBA’s perchance and stubbornness in using domestic Interest Rates as its major weapon to fight the INFLATION genie they and Government is so scare of.

The Australian RBA and its Interest Rate policy:

It would appear that Governments in India, Russia, Brazil, China, and Indonesia are not so concerned with the INFLATION genie as are all Western Governments. To emphasize this point in a more direct way and arising from a telephone conversation with a RBA staffer (Sharon) where the RBA Interest Rate policy was discussed – the following conversation took place –

1st July 2011:

The RBA staffer from the RBA research and statistical Department – and under a media blackout two days ahead of the next RBA Board meeting – stated in part and in response to questions and discussion and to mean the following:

“… The RBA is solely focused on Inflation and in keeping it within a 2-3% band. This is a bi-partisan agreement between the Government and the Opposition under which the RBA has been charged to perform. Inflation is the most important factor in the RBA’s activities …”

About a week ago I wrote a Blog about the FX Cash and Carry trade and what impact it was having on Australia – it is linked Here and the follow up story about what would happen if the A$ was devalued is also – linked here]. Both these issues were raised with the RBA staffer along with the continuing high value of the A$ in hurting trade – tourism and retail within Australia. Their was no comment made to these issues because of a 2 day media embargo and it was suggested that I should write to the RBA – [e-mail address provided as – rbainfo@rba.gov.au] – to air the issues I wanted answers to. This related to the continued talking up of Australian Interest Rates by RBA Governor as he keeps alluding to during press and media releases – all which underpin the A$ value …

The RBA staffer made reference to the inflation history of the 70’s and 80’s and boasted at how successful the RBA had been in containing inflation over the last 20 years.

The response was to state that given the GFC aftermath –

  • inflation around the globe is dead in all Western economies – almost stagflation proportions – and
  • the RBA was enacting an overkill on INFLATION with its use of INTEREST RATES as a measure of moderating Inflation indicators which in turn –
  • was also facilitating the transference of wealth from the Australian Mortgage holders to overseas investors via Interest Rate differentials and Currency appreciation as a result of the high interest rate policy.

This is where the conversation broke down over comprehending the context of the debate and the FX CASH and CARRY trade – I was then asked to submit my questions and equities in writing – which I intend to do.

More Global GDP – Eurozone:

The Eurozone is a basket case of correlated GDP data. The actual EuroZone GDP as opposed to Nations within the Eurozone bear comparison.

EuroZone GDP:

The chart at left shows the collective membership of the Eurozone GDP data since mid 1990 – the Euro currency only came into being on the 1st Jan 1999.

It is a modern currency and as the chart shows – it has only experienced negative GDP quarters during the GFC crisis. However when the individual economies and structure of the EuroZone Nations is reviewed – and where the current Greek crisis is in a GDP context – it is easy to recognise the weakness within the Euro Zone.

When EuroZone Nations like Portugal, Ireland, Greece, Spain [PIGS] – and Iceland to name the most notable – are reviewed – the GDP for the EuroZone is hard to fathom and difficult to see how it can remain positive in quarters to come.

Chart Courtesy of: Trading Economics.com – EUROZONE Click on chart to enlarge.

Looking at Germany and France – the two Nations seemingly holding the whole of the Eurozone together in the aftermath of the GFC – we get a similar GDP like chart format as Australia – plenty of peaks and troughs.

Germany GDP:

The German chart has data going back to 1990 – and during that time it has never risen above a 2% growth – and has only dipped into negative growth nine quarters – and only remained negative for the single quarter.

The GFC period is the only exception where it remained negative for 3-4 consecutive quarters. Also – the negative maximum prior to the GFC was a -1% in late 1993 – all the other dips have been -.5% or less. The peak negative of the GFC period was almost -4% …

Chart Courtesy of: Trading Economics.com – GERMANY Click on chart to enlarge.

France GDP:

The French chart appears to have more severe peaks and troughs than the German chart. This chart data dates back to the late 70’s and the compression of the data is somewhat responsible for this.

The high positive for the whole period is +1.5% and the negative maximum was -.6% prior to the GFC. The FRENCH GDP has only dipped negative seven times in the 30+ years up to the GFC crisis – with most negatives being -.5% or better – the GFC saw five consecutive months of negative data with a peak low of -1.6%.

Chart Courtesy of: Trading Economics.com – FRANCE Click on chart to enlarge.

Looking to some of the weak links in the EuroZone post GFC – the following Charts for Portugal, Spain, Iceland and Ireland portray some glaring differences:

Spain GDP:

Chart Courtesy of: Trading Economics.com – SPAIN Click on chart to enlarge.

Portugal GDP:

Chart Courtesy of: Trading Economics.com – PORTUGAL Click on chart to enlarge.

Iceland GDP:

Chart Courtesy of: Trading Economics.com – ICELAND Click on chart to enlarge.

Ireland GDP:

Chart Courtesy of: Trading Economics.com – IRELAND Click on chart to enlarge.

With the exception of SPAIN – whose numbers represent the greatest consistency of GDP growth of the four Nations portrayed – the other Nations show great variance in the presentation of their numbers.

If GDP alone were to be used as forecast indicators in how economies would survive the GFC – it is an absolute failure.

The example of Spain’s numbers paint a picture of an economy deeply trenched in economic growth with very little responses to other global influences over the time-frame charted prior to the GFC.

In current economic terms – these four Nations are all in serious risk of default on bailout financing packages designed to re-liquify Governments during and post GFC. Those debt refinancial packages are failing and it appears that to satisfy bankers and the EuroZone powerbrokers – severe and hardship austriety measures are being forced fed to citizens.

These bailout packages are at serious risk of failure with Greece being to most prominent at the moment. Spain is suffering under 21% unemployment – Iceland has refused to repay back Bank debt – and Ireland is also in serious trouble fighting for its survival.

What can be deferred from these Nations GDP numbers are that they are not in themselves – a true indicator of real economic activity. Government’s play a huge role in stimulating their economies once the GDP numbers turn negative – or show signs of languishing – i.e. successive quarters of diminished growth generally prompts Governments to introduce some sort of stimulus to regenerate GDP growth. This ‘stimulus’ is usually in the form of Government spending and that becomes DEBT if the stimulus fails to generate the spending it was designed to promote.

The assumption can then be drawn that Governments do take measures to ensure GDP consistency and that in turn means that they do try to window dress their GDP numbers in ways to make them appeal to off-shore investment – and to generate internal consumption.

For off-shore investors to purely use GDP numbers as a basis for investment decisions – their consistency and reflective growth percentages would be a very dangerous measure to use alone. Stable and high growth economies can be misleading as Spain’s current predicament can attest to.

By way of example – since the GFC – Governments around the World have spent $100’s billions to stimulate their own economies. The Australian Government for example has increased its Budget Deficit by as much as A$150 billion in the last three years as the chart below indicates:

Australian Budget Deficit/GDP:

Australian Budget/GDP Chart

If Government Spending – [i.e. Budget Deficits] – as seen in the last three years of the above chart cannot sustain GDP growth – and this is an extreme example of Government stimulus spending since the GFC commenced in earnest late 2008 – has not generated equivalent or multiplied GDP growth – then the decision to spend the money and incur debt will surely backfire.

This is also further demonstrated in the years 1997-2008 where the Liberal Government Budget was in surplus – [see above chart] – and GDP growth was always positive – it becomes abundantly clear that GDP growth comes down to other factors besides Government stimulus.

The most influential of these has to be consumer confidence.

Without the Consumer feeling secure in their job, comfortable with their ability to manage debt, and a savings balance that allows them to make choices to spend surplus earnings, the reality in how GDP can maintain growth is extremely subjective.

Conclusion:

This brings the debate this post poses to its conclusion – Governments and investors alike look at numbers, a host of economic numbers and make policies and investment decisions based on the variance these numbers represent. The “adjustments” or “tweaks” as they’re sometimes called – are Government and policy responses that attempt to strive for an economic solution that has positive Political spin-offs.

That type of solution has vested interests – and most high on that vested interest list is the want for the Government to be re-elected.

If one was to look at the past Australian Governments and look to how they constructed their policies as reflected by their Budget Deficits/Surplus’ – and the GDP relationship during their time in office – you do get some idea how the Labour/Liberal Political accountability is imposed on the electorate.

The chart below is a perfect example – it covers the last 30 years of Australian Politics – and it clearly shows a clear picture between how Labour and Liberal (Coalition) Governments treated the public purse.

Australian Budget Deficit/GDP Prime Minister:

If one was to try and be completely subjective – Labour Governments spend to try and distribute wealth – and Liberal (Coalition) Governments become Scrooge’s – they hoard and diminish the welfare spend and pay down debt accumulated by previous Labour Governments.

The case can then be made in Australia’s case – that GDP and the Budget result have no real direct correlation.

As stated – GDP is totally reliant on consumer spending – and that spending comes from confidence within the peer group and how Governments use Budget spends to influence that confidence relative to their voter bases. Labour toward the social and economically disadvantaged – and the Liberals toward the Employers and Companies who to their mind – drive and create economic wealth for the Nation.

Both are wrong in the true economic sense – but can console themselves and claim bragging rights as one delivers budget surplus’ – and the other budget deficits on a face value platform.

The flip is the Liberals create that much carnage within the welfare and under privileged sector every time they sit in office – that Labour has to balance that carnage whenever they get the opportunity – and as quickly as they can because history shows they have only been in office 50% of the time the Liberals have held the purse strings.

The history of Australian Governments over the last 111 years show the Liberal’s have held office for 74 years and Labour – 37 years – see this link for more detailed info.

Put a different way – Liberal economic management provide surplus’ that are used to give tax breaks to the wealthy – and Labour deficits pares down those surplus’ to redistribute the wealth back to the poor.

Can the economics of the WORLD be made as simple as that?

Australia is a World player in foreign trade, world aid, military assistance under the United Nations umbrella, and fights well above its weight division on and in several other global matters. Australia’s Gross GDP measures A$350 billion according to the RBA data – OPEC has it at nearer US$800 billion – the discrepancy is still unexplained.

The USA GDP measures US$14 trillion – and that represents Australia as about 2.5% the GDP size of the USA. Australia’s population is 22 million against the USA at 310 million – that represents 7% – and again correlation is difficult.

However – if the electorate have strong and inspired Leadership that transcends to confidence within a Nation – GDP will grow. If there is insecurity and Leadership is weak and indecisive – than GDP will falter and no matter how much stimulus is provided and public debt accumulated – in the end – this debt just adds to the burden of recovery – this is the dungheap Australia is currently building for itself under this minority Government.

In conclusion – LEADERS and their ECONOMIC ADVISORS rely of positive numbers to structure policies they want to enact. It is about time these Leaders got themselves a new set of Economic advisors who understand the logical and simple concepts proposed hereto. You cannot fool voters anymore – they know when they’re being shortchanged – and Governments around the World are waking up to this reality.

The Western World is not too far removed from what is happening in Nth Africa and Greece – in six months Ireland, Spain, Portugal and Iceland could be in the same position – thinking that the USA and the UK could also be amongst that throng may sound alarmist and over the top – but when panic and fear become the order of how people face a real situation when they can’t fed their families – the emotive response is immeasurable.

________________________________________

The EYE-BALL Guru …

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  1. January 25, 2012 at 10:19 am

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  2. June 8, 2012 at 7:47 pm

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    The deal with the internet is thta it is a ‘free’ information source – there are pay for data services – and if you want to expend and limit access accordingly – you do so at the risk of losing visitors …

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  1. July 15, 2011 at 9:36 am
  2. June 8, 2012 at 7:51 pm
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