What does the GDP growth figure tell us?


What does the GDP growth figure tell us?

What does the GDP growth figure tell us? | Finshots Daily Newsletter

In today's Finshots we talk about how India's GDP grew by a whopping 20.1% during the first quarter of FY2022, when compared to the same period last year


The Story

The GDP figures obviously don’t tell you the whole story. 20% growth may look exceptional but that’s only because we are measuring this growth based on what happened last year during April, May, and June — when economic activity came to a grinding halt thanks to a nationwide lockdown.

We call this the base effect.

It’s like this — Imagine you’re going at 60 mph and you hit a speedbump. Bam!!! You’ll have to decelerate and you’re back at 20mph — moving at a snail’s pace. But once you navigate the speed breaker, you can floor the accelerator and be back up traveling at 40 mph within a moment’s notice.

Now if I were measuring the growth in speed, from 20 mph to 40 mph, I’d say you did pretty well — doubling your speed in no time. But in reality, you could only achieve this amazing feat because of the speedbump. If the speedbump hadn’t existed, then the current speed of 40 mph would look wholly unimpressive. In fact, it would have meant a de-growth in speed — from 60 mph to 40 mph.

Bottom line —This example should serve as a cautionary tale when dealing with GDP growth figures. A low base can have you convinced that we’re growing at an exorbitant pace, when in fact we may not be growing at all.

But that’s only half the story. The 20% growth maybe exaggerated, but it’s still a promising figure by all accounts. Take for instance the high-frequency indicators — items that give you a granular view of what’s happening across the economy.

You can look at the electricity data and tell if large industries are in production mode. You can look at the number of tractors sold last month and tell whether farmers are confident about the future. You can look at toll collection and tell if trucking activity has resumed. And you can look at several high-frequency indicators like these right now and they’ll mostly be telling you the same thing — there is a definite uptick in economic activity and we could see things normalize soon enough.

Also, remember that even though we didn’t have to deal with a nationwide lockdown this quarter, the second wave did considerable damage to our growth prospects. Multiple state governments imposed lockdowns when in crisis and there’s no doubt that it affected manufacturing and consumption across the country. More importantly, vaccination rates have been picking up since June. So if you were to believe the current trends are likely to persist it’s safe to say that a recovery is much more likely the way things are panning out.

Perhaps the only disappointment is that the government’s contribution to the GDP has been lacklustre at best. When you have an economic downturn, government spending can prop up the economy. They generally have the means to spend big on goods and services and can provide an impetus to growth. Unfortunately, government consumption expenditure contracted 4.8% from a year earlier. So that’s a bit of a bummer.

Then there’s also the fact that private consumption hasn’t normalized either. People (much like the government) aren’t spending on goods and services like they used to and nobody knows for sure why. Now some people suggest that this could be a consequence of wage loss. After all, the pandemic destroyed thousands of jobs and displaced an even greater number of people. So if these folks no longer have the means to earn a decent wage, how are they going to splurge?

Another hypothesis is that people are just being cautious right now. The threat of an impending third wave is still looming large. So maybe people are just waiting it out. In any case, the current GDP figure does offer hope even though it's not extraordinary by any stretch of the imagination. And if things go according to plan, maybe we could be back at pre-pandemic levels by the end of this quarter.

Until then…

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