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Market Capitalization As A Percentage Of GDP

The Wall Street Journal – U.S. Growth Slows in 2nd Quarter [1]

U.S. economic growth pulled back further during the second quarter of the year as consumer spending slowed–a reading that suggests domestic fiscal worries may becoming a more significant drag. The nation’s gross domestic product–the value of all goods and services produced–grew at an annual rate of 1.5% between April and June, the Commerce Department said Friday. The reading is down from the upwardly revised 2.0% growth rate during the prior three months and a 4.1% rate in the fourth quarter of 2011. Economists surveyed by Dow Jones Newswires had expected 1.3% annualized growth during the second quarter…The economy has grown for 12 consecutive quarters, covering all but the first months of the president’s administration, but the gains have been very mild by historical standards and haven’t been enough to significantly push down the unemployment rate. Growth slowed from the prior quarter as the pace of consumer spending eased and state and local governments continued to cut.

Comment

Today the Department of Commerce released GDP statistics for the second quarter of 2012. Below we highlight various measures of GDP, the stock market’s capitalization, and money supply. A complete list of our market capitalization charts can be found here [2].

As of June 30, 2012, stock market capitalization was 103.73% of nominal GDP ($16.18 trillion divided by $15.60 trillion).

Click to enlarge:

 [3]

As of June 30, 2012 M2 as a percentage of stock market capitalization was 61.47% ($9.94 trillion divided by $16.18 trillion).

 [4]

As of June 30, 2012 the two-year change in the stock market’s capitalization increased by $3.65 trillion or 23.38% of the size of nominal GDP.

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Inflation may enter negative zone by Mid June 2009.

INFLATION, which is at 2.4% for the week ended February 28, is expected to fall further. It is likely to reduce below 1% mark next week and closer to zero by end of March.

Thus, the new financial year 2009-10 is likely to begin with negative inflation. Experts feel this spell of negative inflation may persist for a few months and we may see 4-5% of negative inflation by July end. Does this mean India will see ‘deflation’ and its distortionary effects?

To a large extent, this spell of negative inflation is statistical in nature than a structural phenomena says Edelweiss Securities economist Siddhartha Sanyal.  It is largely attributed to the high base effect. Last year, there was a steep surge in commodity and fuel prices in the corresponding months, which peaked out in August 2008. Once this high base effect wanes in later months of 2009, inflation may enter into a positive territory feels Yes Bank’s chief economist Shubhada Rao.

Not just a high base effect but also slowing consumption demand is influencing inflation numbers says Crisil’s senior economist D K Joshi. According to Mr Joshi, negative inflation i.e.: deflation is scary when it co-exists with decline in output. Unlike other developed countries, Indian economy is actually witnessing a growth. So,  occurrence of negative inflation may not have disastrous impact on the economy in general at this juncture.

However, according to Ms Rao, the extent of impact of deflation on the overall economy depends on the pick up in the overall demand in the forthcoming months. During the months of negative inflation, a very little demand is expected from the private sector but a huge investment demand is expected in terms of large government’s spending on infrastructure development. It may push the overall demand and put a floor under the price. Also, possibility of more stimulus provided by newly elected government may lead to some support for demand in India says Mr Sanyal.

Waning of base effect coupled with resilient demand will push the overall inflation into the positive territory. Also, the sustained rise in prices of food articles, which are not influenced by recession, or slowdown in the economy may help inflation to enter into positive zone once again. But, the prices of industrial goods may be suppressed for a little longer on account of slowing industrial activity feels Mr Sanyal. So, the real concern lies for manufactured products.

Inflation dips, but prices of essentials shoot up

MARIAMMA Alexander, a homemaker, has seriously begun to doubt what she reads in the morning papers. Inflation, she is told, is down to a seven-year low of 2.4%. But when she drops by at the neighbourhood greengrocer or makes a trip to the nearest mall, she isn’t amused by what she sees.

Wheat, rice, milk, vegetables and pulses — all the items she tosses into her cart without so much as a second thought — sport bigger price tags each time she goes shopping. “Inflation is coming down only according to the papers. When you go to buy groceries, prices of almost everything have gone up.”

Inflation peaked last August at 12.5%, before easing to 2.4% at present. This can be seen in the attached table for price indices. While the index for all commodities has gone down compared with last year, that for food articles, pulses and cereals is still higher than the last year. This is because the prices of commodities like sugar and rice have risen between 8% and 10% in the past two months, according to the Mumbai Grain, Rice & Oil Seeds Merchants Association secretary Nilesh Veera.

“Prices are constantly fluctuating. Once they go up nobody will reduce them easily,” she says. Ms Alexander has her list ready to drive the point home: The price of premium variety wheat has gone up to Rs 33 per kg from Rs 27 in the past two months. Parimal rice has gone up to Rs 32 per kg from Rs 30 two months ago. Prices of wheat bread and tea have also risen in the past three to four months.

The reason for the disconnect between inflation numbers and prices at the retail level could have to do with a complex interplay of factors, ranging from the method of calculation to the number of intermediaries in the supply chain, or even political intervention in terms of maintaining minimum support prices.

Inflation numbers are compiled by the ministry of commerce and industry after taking into consideration the prices of over 200 items every week, ranging from foodgrains to fuel, and indexing it to the base price of 1993-94. The weekly inflation numbers that are released, are a year-on-year comparison.

Unlike other countries, the most commonly used measure of inflation in India is based on wholesale prices rather than consumer prices. The wholesale price index or WPI, a constituent of inflation, reflects prices at the wholesale end, whereas the consumer price index (CPI) reflects retail prices. Primary food articles constitute 22% of the WPI while it constitutes more than 50% for CPI. So, CPI led inflation for industrial workers is 10.45%
for the month of January 2009 as compared to 9.70% in December 2008.

V Shanmugam, chief economist of Multi Commodity Exchange, points out that the disconnect between inflation numbers and ground reality is mainly due to inefficiencies in the supply chain. “There are too many intermediaries in operation. Also, the government is not incentivising supply chain efficiencies.”

Prices of pulses, on their part, have remained high as the cost of imports have gone up due to a relatively weaker Indian currency. SP Goenka, secretary, Pulses Importers Association, said private importers are registering losses while state-owned companies are selling only to large traders, who in turn, are passing on the higher prices to consumers.
Lower production of sugar has led to higher prices, and the high minimum support price for rice has resulted in a 10% increase in prices. In the current slowdown, it is not just the consumer who feels the pinch. Retailers, too, are offering attractive deals, often at the cost of their margins.

R Ramasubramanian Nadar, director of Mumbai-based single store format retailer AP Mani & Sons, points out that FMCG manufacturers themselves offer good discounts on procurement, but nearly 50% of the added discounts come from the retailers’ profit margins. “Most grocers enjoy an average margin of about 10% and in times like these, we have to dip into our profit margins and play the volume game.” However, consumers feel the offers are just to clear inventories and pep up sales. “Many a time, the offers are attractive but the quality may not be guaranteed or the freebies may not serve your purpose,” says Ms Alexander.