The Republic of India’s latest business cycle indicators portray a drastic drop in consumer confidence contradicted by a healthy 8% year-over-year gain for the booming Asian country’s Gross Domestic Product (GDP) performance on a Purchasing Power Parity (PPP) basis.
Contemplating a study of U.S. financial performance, downturns typically happen within roughly 8 to 16 months from a peak in GDP performance on a PPP basis.
GDP tracks a long-term growth trend via business cycles of growth or recession that repeat approximately every 5 years or so, albeit that no two business cycles mirror the same duration or size. America’s National Bureau of Economic Research found that there were 33 business cycles from 1854 to 2009.
Also, the average length of an expansion is 38.7 months compared to 17.5 months during a recession. Historically, the longest global economic contraction was the 1929 Great Depression that lasted 43 months. That’s more than double the 18-month duration for the Great Recession which began in 2007 and was caused by the real estate bubble created during the 1991 to 2001 boom writes Cameron King in his article for Forbes.
Bear in mind that cyclical indicators are erratic with multiple major influences. Worse, there is no consensus for which indicators universally signal business cycles in all cases.
Nevertheless, The Economist organizes its benchmarks into 3 critical categories: leading indicators that turn in advance of a cycle change; coincident indicators that define when the overall business cycle turns; and lagging indicators that top out following a business cycle.
India’s Leading Business Cycle Indicators
For India, 3 of the selected 5 leading indicators below deteriorated over the 12 months preceding the latest reporting period. Indian consumer confidence slumped by -99.2% as of October 2019. Car sales in India were down almost 1% while the latest available data shows a less dramatic dip for India’s business confidence.
The Economist estimates that an economy hits its highest level about 18 months after interest rates begin to rise compared to 8 to 16 months for waning business and consumer confidence. There are shorter timeframes in advance of an economy’s GDP peak for slowdowns in car sales (6 months), retail sales and building permits (2 to 3 months).
- Interest rates: 5.15% at Dec. 2019 (no change from one year earlier)
- Business confidence: 99.43452 points at Feb. 2019 (down -0.1% from 99.5349)
- Consumer confidence: 0.1 at Oct. 2019 (down -99.2% from 12.8)
- Retail sales: Up 6.6% at Dec. 2018 (up 0.4% from up 6.2%)
- New car sales: 263,773 vehicles at Nov. 2019 (down -0.8% from 265,882)
Business confidence is an indicator based on opinion surveys revealing how pessimistically or optimistically business managers perceive their companies’ future potential and therefore can anticipate turning points in economic activity. In contrast, consumer confidence measures public opinions on standardized questions about household finances, a country’s economy in general as well as plans for major purchases on durable products lasting over a year or buying a home or an automobile.
Retail sales refers to an aggregate measure of the percentage change in the retail sales index against the same month in the prior year. It measures consumer demand for finished goods and is considered a major macroeconomic indicator of whether an economy is moving towards contraction or expansion. Retail sales focus on volume changes only and exclude price level movements.
The car sales metric specifies the number of new passenger cars sold irrespective of price.
India’s Coincident Business Cycle Indicators
Percent changes in Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis are much-scrutinized headline numbers that define whether an economy is contracting or expanding. That’s because year-over-year GDP changes coincide with and thus signal the start of a recession or boom period.
The latest GDP on a PPP basis statistics reveal that India’s economy is robust given the positive annual growth.
- GDP: US$11.326 trillion at Oct. 2019 (up 8% from $10.485 trillion in 2018)
- GDP per capita: $8,378 at Oct. 2019 (up 6.6% from $7,859)
Please note that the Republic of India’s share of the world’s overall GDP of $141.860 trillion was 8% at October 2019, exceeding the 7.7% one year earlier.
In addition, India’s GDP per capita income of $8,378 is under half the global average GDP per person of $18,391 at October 2019.
India’s Lagging Business Cycle Indicators
Despite the latest rosy news about India’s GDP, the Asian Tiger’s capital investment fell by -0.04% year over year. The other 2 selected lagging indicators also worsened on an annual basis.
Usually capital investment shadows GDP peaks and valleys via a 12-month delay. Both inflation and unemployment accelerate about 6 months after GDP reaches its maximum growth.
- Capital investment to GDP ratio: 31.27% in 2019 (down -0.038% from 31.308%)
- Unemployment rate: 8.5% in 2019 (up 1.8% from 6.7%)
- Inflation rate: 3.436% in 2019 (up 0.008% from 3.428%)
The ratio of capital investment to GDP is a lagging but future planning-oriented indicator that records the value that a country spends on capital development and infrastructure projects divided by its overall GDP output on a PPP basis.
Unemployment rate is a crucial percentage based on a country’s total labor force (not its full population) since it profoundly impacts how many debtors can afford to pay their mortgages and other borrowings.
Inflation rate is another headline metric that documents the percentage change in average consumer prices in a country over a one-year period.
Research Reference Materials:
Forbes, Recession Is Overdue By 4.5 Years, Here’s How To Prepare. Accessed on December 20, 2019
MarkLines Automotive Industry Portal, India Flash report, sales volume, 2019. Accessed on December 20, 2019
National Bureau of Economic Research, US Business Cycle Expansions and Contractions. Accessed on December 20, 2019
The Conference Board, Global Consumer Confidence Unchanged in Q3. Accessed on December 20, 2019
The Economist, Guide to Economic Indicators: Making Sense of Economics (7th Edition). Accessed on December 20, 2019
Trading Economics, India Unemployment Rate. Accessed on December 20, 2019
Wikipedia, Consumer confidence index. Accessed on December 20, 2019