The GDP Dichotomy – Recession or Recovery?

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The covid-19 crisis has hit the world economy hard. The GDP numbers across the world have plummeted to levels never seen before. The second quarter numbers for FY 2020-21 have been released for India. It’s a negative 7.5% – indicating contraction in the economy.

Now, here is a dichotomy! On technical terms, two consecutive contractions in an economy mean a recession. So, a contraction of 23% in Q1 followed by the contraction of 7.5% in Q2 puts India in its first ever ‘recession’ – a term economists refer to a situation of negative growth caused by massive slowdown in economic activities. This fact makes the investor in me glum and morose.

However, on the contrary, the dichotomous thought is the strong rebound – indicating a sharp recovery – almost a V-shaped recovery. From the nadir of negative 23.9% GDP growth in the previous quarter, the economy rebounded to negative 7.5% in the July-September period. The growth numbers beat the estimates of most economists – across the three components as well. Manufacturing depicted 0.6 per cent growth in July-September after it had shrunk by a massive 39 per cent in the preceding quarter. Continuing its strong resistance, the agriculture sector grew by 3.4 per cent, while the trade and services sector showed lower-than-expected contraction at 15.6 per cent.

Though the recovery has been sharp, for Q2, India’s among the worst-performing major advanced and emerging economies. It seems India is in for a tough fight as it attempts to curtail rising covid cases, revive consumption demand, boost investment and create jobs. As per the data, only China seemed to have a positive growth rate with 4.9 in the July-September quarter of FY2021. The GDP of US stands at (-)2.9 percent, while for France its (-)3.9 percent. Despite making a recovery, UK and Germany saw a contraction of (-)9.6 and (-)4 percent respectively. While South Korea, Russia and Japan, the GDP contracted by 1.3, 3.6 and 5.8 percent, respectively.

GDP GrowthThis dichotomy in the interpretation of the GDP numbers can be extended to the stock markets. On one hand, the current surge in the stock markets may seems unsustainable – may lead to volatility in the next few weeks, however it seems certainly sustainable over the long run. Most of the stocks, both in the mid-cap and small-cap, space have revived to pre-covid levels.

With economic reforms planned out, it seems the long run rise has just begun. As the vaccine development news pick up gradually, the green shoots for the economy will be more visible. This would create a robust path ahead for our stock markets. India will continue to be prominent player in the global economy, even as the covid concerns recede. Backed with improved domestic fundamentals and confidence of foreign capital, the stock markets are expected to see new highs in the next fiscal.

Look for opportunities in these temporary volatile times. The global investor is bullish on India in the long run. Let’s look for the entry points at every sharp fall, book profits in portfolios that didn’t work well even in the pre-covid times and stay invested through SIP/STP formats for the longer run. So, my dear investors, let’s enjoy the party while being cautious. Abhi to party shuru hui hai!

Dr. Tarunika Jain Agarwal Ph.D.

Alpha Research

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