But suppose, as optimists, we assume the same 6 %
nominal growth rate in the future.
Not exact matches
If the Fed were to adopt an operating policy of achieving a steady
rate of
growth in nominal thin - air credit, it could return to its prior anonymity.
«A decrease
in nominal GDP
growth resulting solely from a one - year, 1 - percentage - point decrease
in the
rate of GDP inflation» reduces the budgetary balance by $ 1.9 billion.
By secular reflation, we mean at least a decade
in which short - and long - term interest
rates stay habitually below
nominal GDP
growth and high grade bonds are not really bonds any more: delivering trend returns that are close to zero or even negative.
After accounting for the impacts of measures and adjustments, the Sales Tax revenue base is projected to grow at an average annual
rate of 4.3 per cent over the forecast period, roughly consistent with the average annual
growth in nominal consumption of 4.0 per cent over this period.
Finally,
in a
nominal GDP targeting regime, a decline
in r - star caused by slower trend
growth automatically leads to a higher
rate of trend inflation, providing a larger buffer to respond to economic downturns.
There is, of course, a great deal of skepticism about the 7 % real GDP
growth rate that China has reported, but we should remember that
in the first quarter,
nominal GDP
growth was much lower, 5.8 %.
In this case the «cost» of financial repression to households was the gap between
nominal GDP
growth and
nominal lending
rates, plus an additional 1 - 1.5 % to account for the larger than normal gap between the lending
rate and the deposit
rate.
Most importantly, with
nominal GDP
growth rates having dropped from 20 % to 8 - 9 % the greatest of all the distortions, the interest
rate distortion, has been the one most dramatically to adjust
in the past three years.
First, it is now much harder for borrowers to justify investment
in non-productive projects because they can no longer count on the huge gap between
nominal GDP
growth and the lending
rate to bail them out of bad investments.
As long as this government debt is rolled over continuously at non-repressed interest
rates, which will be low as
nominal GDP
growth drops, China can rebalance the economy without a collapse
in growth.
Because low - risk investments return roughly 20 % on average
in a country with 20 %
nominal GDP
growth, financial repression means that the benefits of
growth are unfairly distributed between savers (who get just the deposit
rate, say 3 %), banks, who get the spread between the lending and the deposit
rate (say 3.5 %) and the borrower, who gets everything else (13.5 %
in this case, assuming he takes little risk — even more if he takes risk).
For many years
nominal GDP
growth in China was 18 - 21 % and the official lending
rate was around 7 %.
It is only when credit
growth begins to decelerate much more rapidly than
nominal GDP
growth that we can begin to talk hopefully about China's moving
in the right direction, and it is only when credit
growth falls permanently below the
growth rate of the economy's debt - servicing capacity that China will have adjusted.
At a federal - provincial finance ministers» meeting
in December 2012, the Finance Minister announced that, starting
in 2017 - 18, the
rate of
growth in the Canada Health Transfer (CHT) would be reduced from 6 per cent per year to grow
in line with a three - year moving average
in nominal GDP, with a funding guarantee to grow by at least three per cent per year.
While there are some signs of recognition such as the Fed's reduction
in its estimated neutral
rate from 4.5 percent to 3.0 percent during the last 2 years, the IMF's explicit use of the term secular stagnation
in its World Economic Outlook, ECB president Mario Draghi's call for global coordination and greater use of fiscal policy, and Japan's indicated interest
in fiscal - monetary cooperation, policymakers still have not made sufficiently radical adjustments
in their world view to reflect this new reality of a world where generating adequate
nominal GDP
growth is likely to be the primary macroeconomic policy challenge for the next decade.
In the 2006 Budget, the government promised to reduce the deficit by $ 3 billion per year; to reduce the federal debt - to - GDP ratio to 25 per cent by 2012 - 13; to eliminate the total government sector debt (which includes the federal, provincial and local governments as well as the Canada and Quebec pension plans) by 2021; and finally, to keep the growth in program expenses below the rate of growth in nominal GD
In the 2006 Budget, the government promised to reduce the deficit by $ 3 billion per year; to reduce the federal debt - to - GDP ratio to 25 per cent by 2012 - 13; to eliminate the total government sector debt (which includes the federal, provincial and local governments as well as the Canada and Quebec pension plans) by 2021; and finally, to keep the
growth in program expenses below the rate of growth in nominal GD
in program expenses below the
rate of
growth in nominal GD
in nominal GDP.
Interest
rates and
nominal economic
growth rates tend to move
in tandem, so their competing effects on «justified» valuations generally cancel out.
Then again, a sustained period of suppressed interest
rates is only likely
in a continued environment of restrained
nominal economic
growth.
This could include setting targets for
nominal GDP
growth rather than inflation, investing
in a wider range of risk assets, making plans to allow base
rates to turn negative, and underscoring the importance of avoiding a new recession.
That alternative, which Market Monetarists like David Beckworth, Lars Christensen, and Scott Sumner have been pushing ever since the Great Recession started, is for the FOMC to keep its collective eye, not on the inflation
rate, but on the level and
growth rate of
nominal GNP — a measure of the flow of spending on goods and services
in the economy.
Other factors driving
rates lower — low
nominal global
growth, an older population, lower fixed income supply and the disinflationary pressure of technology — will likely remain
in place.
The large
nominal exchange
rate appreciation also helped to contain inflationary pressures
in an environment of strong
growth in domestic demand and a decline
in the unemployment
rate to relatively low levels.
This is a percentage point lower than average potential
growth in the decade prior to the crisis... We estimate that the real neutral policy
rate is currently
in the range of 1 to 2 per cent... This translates into a
nominal neutral policy
rate of 3 to 4 per cent, down from a range of 4 1/2 to 5 1/2 per cent
in the period prior to the crisis.»
Indeed, because the level of interest
rates at any point
in time is highly correlated with the level of
nominal economic
growth over the preceding decade, the relationship between starting valuations and actual subsequent S&P 500
nominal total returns is nearly independent of interest
rates.
In that case the economy would need to slow two full percentage points, to a
nominal growth rate of 3.6 %, to match the longer - term average.
In 1991, the
nominal GDP
growth rate hit a low of 2.9 %.
In Spain, strong credit growth partly reflects the decline in nominal interest rates associated with European Monetary Unio
In Spain, strong credit
growth partly reflects the decline
in nominal interest rates associated with European Monetary Unio
in nominal interest
rates associated with European Monetary Union.
Our model indicates that going forward, long - term yields will likely be subject to three upward pressures: (1) Our forecasted increase
in inflation will boost
nominal GDP
growth; (2) As forward guidance is replaced by a data - dependent monetary tightening, volatility
in short
rates will increase; and (3) As the impact of QE on the Treasury market fades, long - term yields will trend back to their historical link with
nominal GDP
growth.
During this period, a smoothed average of
nominal growth explains almost 60 % of the variation
in long - term
rates (see the chart below).
The level of yields — around 4 1/4 per cent at present — looks low not only on historical comparisons but also relative to normal benchmarks such as the
growth rate of
nominal GDP, which
in the US is currently around 6 per cent (Graph 16).
Now, we're sympathetic to the idea that prospective real
growth and inflation may be sufficiently lower
in the future to place us into a low
nominal growth world, which would also justify lower equilibrium interest
rate levels.
I should note that
in each of these models, we're assuming a long - term
growth rate for cyclically - adjusted earnings, revenues, dividends,
nominal GDP and so forth of about 6.3 % annually.
But as I noted last week (see Two Point Three Sigmas Above the Norm),
nominal growth and interest
rate variations have historically canceled out over the past century, with little effect on the accuracy of our valuation estimates — matched reductions
in the
growth rate and the discount
rate really don't affect fair value.
«Historically, you get a 17 %
growth rate in a bull market with
nominal GDP at 7 and real GDP almost at 4.
In 2015, with a
growth rate of 6.7 per cent, China produced additional
nominal output of US$ 552 billion.
The data is unambiguous on current economic conditions - GDP
growth in the last quarter of 2015 was a meager 2.11 % with full year
growth of 2.79 % according to the National Bureau of Statistics (NBS); inflation rose sharply to 11.4 %
in February with prospects of reaching 12 % by March; capital markets have remained bearish; according to UNCTAD Nigeria's FDI fell by 27.7 % to $ 3.4 billion
in 2015, and on current trends may fall even more precipitously
in 2016; the de facto exchange
rate of the Naira for most producers and consumers is now N322 / $ even though CBN maintains a
nominal N197 / $ for privileged persons; several economic sectors - construction, government, manufacturing, oil and gas and hotels and restaurants are
in recession or barely out of it; government's official foreign reserves is down to $ 27.8 bn; and unemployment and under - employment
rates have worsened 10.4 % and 18.7 % by the end of 2015.
According to Nielsen Bookscan, sales were up 1.65 %
in the first quarter of 2015, but this can only be seen as
nominal growth as the official inflation
rate was pegged at 6.41 % last year, the market size actually decreased when compared to 2014.
Other factors driving
rates lower — low
nominal global
growth, an older population, lower fixed income supply and the disinflationary pressure of technology — will likely remain
in place.
For small values of inflation, simply subtracting the inflation
rate from the
nominal return gives a reasonably accurate approximation of the real return, but for larger values, the exact formula should be used.4 For our example the formula is 2.11 / 1.26 - 1 = 1.67 — 1 = 0.67 = 67 % (2.11 is the
nominal, investment
growth factor calculated as $ 21,090 / $ 10,000, and 1.26 is the inflation factor derived
in the previous paragraph).
Companies that are able to pass on inflation to customers could increase their expected
growth rates by more than the rise
in the
nominal discount
rate.
The formula for the real income of an investment at year N is: Inflation adjusted dividend income = (initial dividend amount) * -LCB-[1 + (
nominal dividend
growth rate)-RSB- ^ N -RCB- / -LCB-[1 + (inflation
rate)-RSB- ^ N -RCB- Typically, you would use a
nominal dividend
growth rate of 5.5 % per year
in the absence of other information and 3 % per year inflation.
Keep
in mind that these are
growth rates of the
NOMINAL dividend amount.
In that case the economy would need to slow two full percentage points, to a
nominal growth rate of 3.6 %, to match the longer - term average.
In 1991, the
nominal GDP
growth rate hit a low of 2.9 %.
This is because the
growth rate in the
nominal dividend amount is usually steady, but inflation jumps around considerably.
Negative
Rates and Returns Real interest rates (nominal interest rates minus the inflation rate) determine the growth in real purchasing power from investing in b
Rates and Returns Real interest
rates (nominal interest rates minus the inflation rate) determine the growth in real purchasing power from investing in b
rates (
nominal interest
rates minus the inflation rate) determine the growth in real purchasing power from investing in b
rates minus the inflation
rate) determine the
growth in real purchasing power from investing
in bonds.
This has gotten too long, but one thing that I will try over the next few days is estimate
Nominal GDP
growth rates for nations
in the «ring of fire,» and their Government's financing
rates.
ECONOMIC OVERVIEW Minister of Economic Development and Trade: German Oskarovich Gref Minister of Finance: Aleksey Leonidovich Kudrin Currency: Ruble Market Exchange
Rate (11/6/02): $ 1 = 31.8 rubles
Nominal Gross Domestic Product (GDP)(2001E): $ 319.3 billion; (2002E): $ 352.6 billion Real GDP
Growth Rate (2001E): 5.0 %; (2002E): 4.1 % Inflation
Rate (Change
in Consumer Prices, Dec. 2000 - Dec.
Over the period 2005 - 2016,
rates and taxes grew at an annualized
rate of inflation +8.2 % equating to a compound annual
growth rate of 12.1 %
in nominal terms.