Such a Gross Domestic Product! 📛

by | 7 Nov, 2019

Such a Gross Domestic Product!

A brief skim through the International Monetary Fund’s (IMF) latest report makes for damning reading in developed Europe. However, investors surfing Europe’s emerging frontiers are laughing all the way to the bank.

Firstly, a look at the difference between real and nominal gross domestic product (GDP)! Let’s pretend that Canada only produces maple syrup, and so its entire GDP rests on maple syrup. In 2009, let’s say Canada produced 100 jars of waffle-topping treacle and sold each jar for $10. The country’s GDP is, therefore, $1000.

Ten years later, in 2019, you notice GDP has jumped to $1500. Great, a 5% annual increase! Not so fast! When you look at the number of jars being produced, you realize it’s still only 100 jars. That’s odd.

Due to inflation, Canadians demand higher wages and the price of maple syrup has to keep up. From $10 to $15 a jar, the price is what changed, not the productivity. Canada’s nominal GDP growth was 5% annually, but its real GDP growth was effectively zero.

The growth of real GDP in the Eurozone was just tipped to fall as low as 1.1%, and that’s not very good!

It’s almost half the growth realized in 2018, and Lagarde’s European Central Bank has backed up this grim outlook. The usual culprits are to blame. Brexit, which has been delayed, and trade war negotiations, which have also been delayed, are dragging down confidence. However, countries still finding their feet in Europe are licking their lips!

Some investors are betting big on the Borsa! The IMF expects Turkey to go from 0.1% to 3% real GDP growth next year, in a steep recovery from its recession. Russia, too, is on the uptick. GDP growth there could double next year as the country chases down a new trade deal with China. 

So, European frontiers appear unperturbed by the mess that “developed Europe” has found itself in, but how much you trust the IMF?

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