We are all aware that this pandemic has hit our lives and economies badly. But how bad is it and what’s the truth?
1. India’s GDP is the worst performer.
2 . US is the worst performing economy.
Reality behind these headlines. The ADVANCE gross domestic product showed that in the second quarter of 2020, US GDP declined at an annualised rate of 32.9%.
32.9% is an ‘annualised rate’. This is the fact which is hidden in the media to create a false frenzy.
What is ‘annualised rate’? The US has traditionally reported GDP and some other economic statistics as annual rates. Rather than simply giving a percentage change from one quarter to the next, the government reports, how much GDP would grow or shrink if that rate of change were sustained for a full year. ( Because growth rates are compound on themselves this calculation is abit more complicated than simply multiplying by four. The figures also adjusted for seasonal patterns so they’re more properly described as “seasonally adjusted annuall rates”.
Annualised GDP data can be misleading. When it reports quarterly GDP, the BEA presents the data in several different ways to aid the analysis. Among them are: 1) Growth or contraction from one quarter to the next (which was – 9.5% in the preliminary Q2 GDP report). 2) Growth or contraction in the quarter on an annualised basis (which was -32.9% in preliminary Q2 GDP report).
The latter ‘annualised rate’ projects how much economy would grow or shrink if the rate of change seen in the quarter continued at the same pace for four consecutive quarters with some adjustability for seasonality and compounding effects.
In order for the economy to actually contract as a whole by an annualised rate of -32.9% , the GDP would need to contract in Q3 and Q4 at least by -9.4%.
This pandemic is a big jerk to the economy. The difference in economic activity will be large from one quarter to another, it cannot be considered same across the year.
Hence the comparison made by some news articles is very much misleading and blinding the public. This does not portrait the true picture of the economic condition.