CONCEPT – BOTTOMING OUT

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 CONCEPT – BOTTOMING OUT

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• The idea: "Bottoming out" generally means a market reaching its lowest point, before beginning to rise again. In the context of an economy, it means that an economy has seen the worst phase of low growth, and is now on slowly moving towards a positive growth path.
• World economy, end 2019: There was some optimisim after a long phase of pessimism. Key to optimism was that the risks of trade wars and Brexit were evolving in positive ways, and the possibility of a radical policy shift to the far left in the U.S. and the U.K. after their respective elections seemed remote.

1. Growth expectations: Global growth may be 3.1% in 2019 and next; for US, China and Eurozone, growth may dip in 2020 and then bottom out completely.
2. Among the downside risks are escalation of the U.S.-China trade war; an extension of tariffs to Europe, which would hit global growth hard and trigger recessions; rising tensions between Iran and Saudi Arabia; and a U.K. crash out of the E.U.
3. A U.S.-China phase one trade deal was not seen happening until the end of December 2019, at the earliest. Elsewhere, China will sanction several American pro-democracy organizations in retaliation for U.S. legislation supporting Hong Kong protesters.

• Indian economy, end 2019: The poor GDP growth figures for second quarter (July - August - Sept 2019) at just 4.5% raised fears that the coming quarters may be worse. The contraction in manufacturing sector (by 1%) indicated so. But the government was confident that various measures taken will help the economy rebound quickly. That remains to be seen. If the slowdown were to persist, recovering would take that much longer.

1. Tax rate cuts were expected to boost investment in the economy.
2. Various stimulus measures too were expected to boost credit available, and hence demand.

• When and how does a recession occur: A recession occurs when a fall in a measure of aggregate economic activity causes cascading declines in the other key measures of activity, according to a 2006 working paper co-authored by Delhi School of Economics professor Pami Dua. Recession is characterized by a domino effect—when a dip in sales causes a drop in production, it triggers a decline in employment and income. This decline, in turn, results in a further fall in sales as consumer confidence dips and people are reluctant to make purchases—resulting in a vicious cycle and, ultimately, a recession. This could again lead to capacity and job cuts.
• How can a recession be identified: There is no single marker that can be a barometer for recession. Relevant measures include output, employment, income, and wholesale and retail trade. Because of its simplicity, the most popular definition for determining the onset of recession is two consecutive quarters of negative GDP growth. However, when a decline in GDP does not trigger the characteristic vicious cycle of falling employment, income and sales, it does not constitute recession. The supply of money or credit, government spending and tax policies, and relations among prices, costs and profits help predict downturns and upturns.

• India as a major economy – our goals

1. Rapid GDP growth rate
2. More jobs, more investments, more projects
3. Target of $ 5 trillion by 2024-25
4. Today’s size $ 2.8 trillion
5. More GDP means higher per capita income
6. Economic prosperity = Per capita income + equitable distribution
7. India’s global heft depends on economic power

• India as a major economy – our goals

1. For our size of young population, we need at least 8 – 9% per quarter GDP growth rate
2. That will ensure more jobs and employment
3. Less than that and the catch-up rate will grow
4. The new graduates need jobs, and only rapidly growing manufacturing (and services) can give high-quality, large-number jobs

• Second Quarter of 2019-20 – GDP growth figure is out

1. GDP for second quarter grew by 4.5% (Y-o-Y), constant prices, 2011-12 series
2. GDP for H1 (first half 2019-20) grew by just 4.8% (Y-o-Y) 
3. Remember RULE OF 72. At this rate, the GDP to take (72/4.5) = 16 years to double and cross $5 trillion
4. GDP at Constant (2011-12) Prices in Q2 of 2019-20 is estimated at Rs.35.99 lakh crore, as against Rs.34.43 lakh crore in Q2 of 2018-19, showing a growth rate of 4.5 percent. (For Q1 this year, it was 5%)
5. Nominal GDP – 6.1% Q2, and 8% Q1  (all tax calculations on it)(Nominal – Inflation rate = Real GDP)
6. Quarterly GVA (Basic Price) at Constant (2011-2012) Prices for Q2 of 2019-20 is estimated at Rs.33.16 lakh crore, as against Rs.31.79 lakh crore in Q2 of 2018-19, showing a growth rate of 4.3 percent Y-o-Y.(For Q1 this year, it was 4.9%)

• The basic terms – GDP, GVA, Real, Nominal, Constant

1. Real GDP growth & Nominal growth : Nominal GDP growth is the inflated figure, and once inflation rate is subtracted, we get the Real GDP growth figure. All this happens at "current prices". 
2. GVA is supply side : When we calculate economic growth from supply side, we measure the value-added (in rupees) by various sectors. These are (a) Agriculture, (b) Industry, and (c) Services. (sub sectors exist, and all workers are covered) So we add the value-added for all, and get the Gross Value Added (total income generated for all workers).
3. GDP is demand side : When we calculate from demand side, we get the GDP. Calculate the expenditure made by all spenders. Four types - (a) Private consumption, (b) Govt. consumption, (c) Business investments, and (d) Net exports (Exports - Imports).
4. Gap is net taxes : GDP includes taxes and subsidies that govt. gets and gives, resp. That net taxes component is the difference between GVA and GDP.Gap is net taxes : GDP includes taxes and subsidies that govt. gets and gives, resp. That net taxes component is the difference between GVA and GDP.
5. So, GVA + taxes on products – subsidies on products = GDP
6. When to use what : While comparing internationally, use GDP, and while comparing sectors internally, use GVA. Even for quarterly data, GVA is better.

• Deep dive in meaning
• Real danger : The Nominal GDP growth figure has sharply slowed down, and was only 6.1% for Q1.The Govt. expected it to be 12% for Q1. (So 12% - 4% = 8% real growth was expected) Now with just 6.1%, all tax collections will estimates collapse. Such a low nominal growth happened only once, post 2009 crisis.
• Low GVA : At only 4.9% in Q1 and 4.3% in Q2, the GVA shows that producers are just not adding enough value, so their income growth is low. Most of the decline is in Agriculture and Industry. The Mfg. sub-sector within Industry has collapsed. Other two (Mining & Quarrying, and Construction have slowed for 5 quarters)
• Employment angle : Since Agri and Industry employ the most people, that too the poorest and least educated, their incomes are stagnating or reducing. Poor education means they can't get into services.
• Demand side weakness : Since GVA is weak, incomes are weak, so demand side is weak as well. Indian GDP has private consumption at 55%, and it grew by just 3.14%. Why this fall? Most workers are just not earning well enough.
• Meaning of it all :  

1. Coming quarters will be tough
2. GDP forecasts are being reduced constantly
3. Full year growth may collapse badly, 
4. Fiscal deficit targets will be breached, 
5. Tax collections to fall short, so govt. may not be able to spend much.

• A magical rule from Compound Interest theory!
• RULE OF 72

1. Rule says that time taken to double India’s GDP is 
2. 72 / GDP growth rate
3. So India's GDP growth – Time taken to double
4. 4% - 72/4 = 18 years
5. 5% - 72/5 = 14.6 years
6. 6% - 72/6 = 12 years
7. 7% - 72/7 = 10.28 years
8. 8% - 72/8 = 9 years
9. 9% - 72/9 = 8 years
10. 10% - 72/10 = 7.2 years
11. 12% - 72/12 = 6 years
12. 8% - 72/8 = 9 years
13. 9% - 72/9 = 8 years
14. 10% - 72/10 = 7.2 years
15. 12% - 72/12 = 6 years

• How did we get this rule – explanation 
• RULE OF 72

1. Future Value = PV × (1+r)n
2. where: PV = Present Value, r = Interest Rate, n = Number of Period
3. To double an investment, put Future Value as 2, and PV as 1.
4. => 2 = 1 x (1 + r)n    => 2 = 1 × (1 + r)n   => 2 = (1 + r)n
5.  Take the natural log of each side:
6. ln(2) = n x ln (1 + r)     => ln(2) = r x n

• Historical snapshot – PFCE growth
• RULE OF 72

1. Future Value = PV × (1+r)n
2. The natural log of 2 is equal to 0.693 and, after dividing both sides by the interest rate, you have:
3. 0.693 / r % = n
4. 72 is closest to 0.693 and has factors like 2, 3, 4, 6, 9. So we take 72.

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