What goes around, comes around

During the past few years till 2007, the economy of almost every country has witnessed significant growth. According to data from the International Monetary Fund, global GDP grew from around US$51 trillion in 2004 to around US$65 trillion in 2007 – more than 25% in 3 years. The GDP growth rate in 2007 was 5%, which is considered to be a good rate. The economies of developed countries, such as tthe US, Japan and those  of the European Union, grew by 2- 3% in 2007. This is solid given the large base of these countries. In the case of developing countries, such as India and China, growth rates of 7-10% are considered solid given their low base. These  countries have registered such growth rates over the past 4-5 years.

GDP growth rates peaked in most countries during 2007 and since then there has been slower growth. It is important to note that most countries are witnessing a decline in growth rate, not negative growth. The decline is expected to last for the next 2-3 years before the trend is reversed. The Indian economy registered a growth rate of over 9% in 2007 and despite news of an economic crisis,  the economy is expected to grow at around 7% in 2008. The US economy grew 2.2% in 2007 is expected to decelerate to less than 2% in 2008. In 2009, even if the growth rate is less than that in 2008, it should not be cause for alarm. For a large , developed economy, even a 1% growth rate is positive considering population growth is less than 1%. So in this perspective, the current economic situation is less of a crisis and more a slowdown. The sensational news stories of  economic meltdown are exactly that, sensational. The actual concern should be on the future and how growth rates develop over the next few years.

The stock market situation is somewhat similar in its lack of fundamental change. Take for example the Bombay Stock Exchange in India; its Sensex benchmark rose from around 10,000 in early 2006 to over 20,000 in early 2008, doubling in 2 years. Naturally, such an increase motivates initial investors to take profit by selling their shares. The Sensex is again around the 10,000 level. I expect investors, both new and old, to start entering the market at this level. We have to remember that since 1978-79 when the Sensex  was at 100, the index has reached to 10,000 in 2008, a 100-fold increase in 30 years. The price of gold has increased only by 20 times in the same period.

I believe that both the global economy and stock markets will face pressure in the short term, with industry being hit. However, with prudent intervention, I believe long term trends are positive.


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