2011 Global GDP Overestimated by World Bank

A look at the World Bank's estimates for international GDP rates accents the overestimate of U.S. GDP made by the Commerce Department in the first quarter of 2011. Originally believed to be 1.9 percent, the revised estimate is .4 percent. As a result financial firms such as J.P. Morgan and others have adjusted their 2011 GDP rates downward per the International Business Times. The adjusted U.S. rates range between 1.7-2 percent, .6-.9 percent lower than the World Bank estimate as of August 2011.

Japan, the Eurozone and China, all large economies have smaller than expected GDPs for 2011. These economies plus the U.S. Economy account for more than 50 percent of global GDP meaning for every 1 percent drop in GDP in these areas, the global GDP drops 50 basis points or half a percent. Moreover, for every 1 percent drop in U.S. GDP a corresponding fifth to quarter percent or 20-25 basis point drop in Global GDP is estimated.

The World Bank estimates global GDP for 2011 of 3.2 percent, with corresponding GDPs of 9.3, 2.6, 1.7 and .1 for the four largest economic areas. The Singapore Business Review quotes Credit Suisse as downgrading Chinese GDP to 8.8 percent due to inflationary pressure and tighter monetary policy. The Association of Three Leading Eurozone Economic Groups claims the Eurozone will experience 2011 GDP growth of .47 percent, or 1.2 percent less than the World Bank's estimate.

Collectively, .2 percent less global GDP from the U.S., .24 less from the Eurozone, and .075 less from China adds up to .515 or half a percent assuming approximate percentage shares of GDP of 20 percent, 20 percent and 15 percent respectively. Based on the World Bank estimate of 3.2 percent Global GDP growth, that would mark it down to 2.7 percent.

That's not terrible, but for those countries relying heavily on Global GDP expansion the economic affect will be proporitionally larger. These variables also constantly change with increases and decreases to the price of oil, international events and with methods of calculation. That being the case, any estimate of Global GDP is not set it stone.

GDP Revisited: Are Statistics Reliable Enough for Financial Decision Making?

Relying on statistics when making personal financial decisions can be a tricky and risky business. The word 'statistic' when looked at from a purely semantic perspective does not mean 'factual' and the sheer complexity of determining statistical validity leaves plenty of room for confusion.

If any statistic has no demonstrated validity to qualify it, it's as good as an unsorted statement in an academic journal and hasn't been substantiated to the reader. This alone should cause one to think twice even if those statistics are coming from a reliable source. 

Statistics are often based on samples which makes those measurements representative at best. Furthermore, how those samples are selected leaves lots of room to manipulate the statistical results before they're even measured. Similar to attorneys weeding out jury candidates least likely to agree with their legal arguments.

Let's take a look at the following bar graph from the BEA to see where there is room for confusion:

• No reference to statistical validity is given

• Graph represents percent change not dollar value

• GDP itself is measured in a 'specific' way

• Doesn't mention inclusion of Government spending

• 'Seasonal adjustments' not accounted for in graph

The following table excerpt, also from the Bureau of Economic Analysis points out GDP in 2005 dollars is lower meaning the intrinsic value of GDP is actually lower. Someone looking at the GDP bar graph might actually assume it represents actual GDP.

Quarterly
(Seasonally adjusted annual rates)
	GDP in billions of current dollars	GDP in billions of chained 2005 dollars
2005q4	12,915.6	12,748.7
2006q1	13,183.5	12,915.9
2006q2	13,347.8	12,962.5
2006q3	13,452.9	12,965.9
2006q4	13,611.5	13,060.7
2007q1	13,789.5	13,089.3
2007q2	14,008.2	13,194.1
2007q3	14,158.2	13,268.5
2007q4	14,291.3	13,363.5
2008q1	14,328.4	13,339.2
2008q2	14,471.8	13,359.0
2008q3	14,484.9	13,223.5
2008q4	14,191.2	12,993.7
2009q1	14,049.7	12,832.6
2009q2	14,034.5	12,810.0
2009q3	14,114.7	12,860.8
2009q4	14,277.3	13,019.0
2010q1	14,446.4	13,138.8
2010q2	14,578.7	13,194.9
2010q3	14,745.1	13,278.5
2010q4	14,871.4	13,380.7
2011q1	15,010.3	13,441.9

Even the accuracy of statistics can be measured in a number of ways. Perhaps even too many ways as the usefulness of anything becomes questionable if it has to be tested, retested and be the subject of a barrage of diagnostics before an assessment can be made about its accuracy. In actual dollars the percentage change from 2010 Q4 to 2011 Q1 is less than 1/2 a percent, 50 basis points or .005 percent which all mean the same thing. 

So how should one use statistics to make decisions in personal finance and what kind of decisions can be made with statistics? For starters subtracting government spending from deficit spending will yield a number of non-leveraged GDP which can be more realistic. Secondly, looking at just GDP may provide an overly generalized and depending on the graph, inaccurate economic performance metric. 

Japan's Economic Affect on Global GDP

According to Roubini Global Economics a 3 percent decline in Japanese Gross Domestic Product equates to a .3 percent reduction in global GDP. The Japanese economy officially entered a recession when it reported a second quarterly decline in GDP; Q1 2011 GDP declined .09 percent and an estimated 3.7 percent drop for the year according to Roubini.

Morgan Stanley forecasted a 4.2 percent global GDP for 2011 in May 2011, however this may not have included the Japanese GDP news that came out on the 19^th of May. If it does, that would make global GDP rise 3.83 percent assuming no previous pricing in. The World Bank puts 2011 real global GDP at 3.3 percent and the Conference Board estimates a 4.5 percent growth. This growth is good, however it is being driven by emerging economies.

Whether or not this will affect national economies such as the U.S. in a good way will be determined in part by how well U.S. Corporations are able to capitalize on international business opportunities where the growth is. A low U.S. GDP in 2011 would consequently seem to indicate an inability to take full advantage of those opportunities. The result of which will likely directly affect main street, employment and potentially business investment.

The U.S. Economy is forecasted to grow 2.6 percent by the Conference Board, however it also states Japan's 2011 GDP will be 1.7 percent. Perhaps this particular conference Board assessment is overly optimistic. The U.S. Economy is forecasted to grow about 2.9 percent according to a UPS assessment cited by Morningstar.