Friday 10 November 2017

Economic Growth Rate: Is Higher rate the Future course?

Economic Growth Rate: Is higher rate the Future course?

Recently, the debates are going on regarding the Economic growth rate. Some has said that economic is doomed where as some are saying that a correction in the economy is going on account of various measures being taken. If the side screaming that economy is doomed is believed, then the question comes into mind that if the economy will rise or will it fall further.

Before going further, here is the history of Growth rate for past 6 years, quarter wise.
If the history is seen, any economy's growth rate appreciated and depreciates in course and never continues to appreciate in a continuum. Further if details are studied it can also be noted that any factor that affects the market (bull market) of the economy also affects the growth rate of the economy. Hence can we use the tools that are used to predict the direction of market be used to predict the direction of growth rate? 

Yes there are various different factors that actually contribute to Growth rate, but if the analogy is seen with the Market due to the relative nature of the two, then so does for the market. But still various statistical tools have been able to predict the movement with a good success. So with the analogy on account of various factors, let us see if the history of Growth rate movement obeys the statistical approach used for the market and if so, what does it say about the future course. There is no conceptual proof of it to work for future, but let me make an attempt to see if it can used and if the future course falls in line, it will only strengthen the argument.

Some of the important tools use for the market to predict the movement are Relative Strength Index and Fibonacci Retracement. Relative strength index concept is a momentum indicator of market. The simple outcome of RSI is that once it goes up, then it should come done, thus dragging the market. Fibonacci retracement is a tools that predicts the various levels of rise or fall as per the Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% or 100%.
Note: Average period for RSI calculation taken 3 Quarters.
Now, if the history of Growth rate is studied, it can be noted that any rise or fall almost follows the Fibonacci retracements. Also if RSI, calculated on three quarter time frame, is seen it seems that the growth rate is also moving in in accordance. Whenever there has been a drop in RSI, there has been a cyclic rise, resulting in rise of growth rate as well. So historically it seems to be following the statistical methods, hence they may follow in future as well.

Now, coming to the future prospects, it can be seen that at current levels RSI for the growth rate stands at 13.6 which is very low. So can be clearly said that there is a very insignificant chance of it falling. For next few quarters, it will only rise, evidently resulting in improvement of the growth rate. Still inn case if there is fall, which is highly unlikely at current RSI, then the fall may be to the levels of 4.35 following the retracement of 23.6%.

Also, if Fibonacci retracements are drawn from the current low at 23.6% then it may jump to 7.05% within 2 or 3 quarters. If the stimulus for growth is strong, like the current PSB recapitalization, then it may rise to 7.9% as well following the 38% retracement or even 8.5% following 50% retracement.

However, any rise of growth rate, beyond 8.5% within next 3 or 4 quarters without a fall in the rate does not seem to be possible statistically as in that case the RSI may touch 85+ which means there has to be a small dip in subsequent quarter before rising as shown above.

So, from above, it can be said that a higher growth is possible statistically but a growth beyond 8.5% is highly unlikely within next 5 quarters, without any small dip. Also, like in the past, let's hope that the levels also respect the statistical tools. Once again, there is no surety that it will work, but if it does then we have a strong argument to use it as a part to predict as well.

1 comment:

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