Economic Analysis 174

4.1 Business Cycle Analysis 174

4.2 Economic Growth Trends 190
4.3 Exogenous Shocks 196
4.4 International Interactions 198
4.5 Economic Forecasting 202
4.6 Using Economic Information in Forecasting Asset Class Returns
210
4.7 Information Sources for Economic Data and Forecasts
GP-5 PARTICIPANTS
1.Ko Kai Roll-
2.Ma Kee
3.Ma Aye Shwe
4.Ma Ya Min
5.Phyu Kyi Han Nyunt
6.Myint Moe Khine
7.NanDa Aung
8.Tin Htun Aung Roll-63
Economic Analysis:

The competitive advantages by ability to

Understand which economic variables may be most relevant to the current

economic environment.

Forecast a change in trend or point of inflection in economic activity.

Above present unique investment opportunities.

Points of inflection:

What is driving the economy in its current expansion or contraction phase?

What is helping to maintain economic growth, demand, supply, and/or

inflation rates within their current ranges?

What may trigger the end of a particular trend?

4.1 Business Cycle Analysis

Two cycles are generally recognized:

a short-term inventory cycle
a longer-term business cycle

Cycles mark variation in economic activity.

The chief measurements of economic activity are as follows:
Gross domestic product (GDP)
Output gap
Recession
4.1.1. The Inventory Cycle

2 to 4 years
measured in terms of fluctuations in inventories
caused by companies trying to keep inventories at desired levels as the
expected level of sales changes
takes a year or two for business to correct inventory levels after an
inflection point
A good indicator of the inventory position is the inventory/sales ratio
4.1.2. The Business Cycle

9 to 11 years
represents fluctuations in GDP in relation to long-term trend
growth

A typical business cycle has five phases:

initial recovery,
early upswing,
late upswing,
slowdown, and
recession
4.1.4. Market Expectations and the Business Cycle

If the current phase of the cycle could be identified and correctly

predicted when the next phase will begin, opportunity there to be able
to make money easily but several interrelated reasons to be considered.

The phases of the business cycle vary in length and amplitude

Recessions can be steep
Downturns can be frightening
4.1.5. Evaluating Factors That Affect the Business Cycle

For the purposes of setting capital market expectations, we need to focus

business cycle analysis on four areas:
Consumers
Business
Foreign trade
Government activity, both monetary and and fiscal policy
4.1.5.3. Monetary Policy

used as a mechanism for intervention in the business cycle.

The key variables watched by monetary authorities are as follows:

The pace of economic growth.

The amount of excess capacity still available (if any).
The level of unemployment.
The rate of inflation.
4.1.5.3.2 Money Supply Trends

Money supply is the good indicator of monetary conditions and the

trend of the economy.
In the long run, there is a stable relationship between the growth in
money supply and the growth in nominal GDP.
If money growth is strong in relation to nominal GDP.
The growth will accelerate in the future and that inflation may
accelerate.
4.1.5.3. What Happens When Interest Rates Reach Zero?

Central banks manipulation of interest rates are affect the economy.

What happens if the economy is weak and interest rates have fallen to
zero?
In Japan , interest rates is important of economic downturn.
If inflation is not at high , interest rates are at zero.
Central bank can push cash directly into the banking system.
This is limited success because there was no desire to borrow or lend.
A second is devalue the currency.
The third option is short-term interest rates low.
The bank of Japan buying government bonds , small amounts of stocks
and buy property or overseas assets.
The central bank authorities effect monetary policy, low rate of inflation,
retaining interest rates to affect the business cycle.
 4.1.5.4. Fiscal Policy

Fiscal policy means manipulating the budget deficit to influence the

economy.
Governments increase spending or cut taxes to increase the economy and
cut spending or raise taxes to slow the economy.
Fiscal policy, or fiscal stance, is two points.
First, focus on the changes in the government budgetary deficit.
Second, is deliberate changes in government fiscal policy.
The deficit tends to rise because tax revenues fall and government
spending on unemployment benefits increases.
When the economy grows strongly, the budget deficit falls.
4.2. Economic Growth Trends
The economic growth trend is the long-
term growth of GDP.
The long-term growth reflects the
average growth rate around which the
economy cycles.
Economic trends , Business cycles take
the economy through an alternating
4.2. Economic Growth Trends
The economic growth trend, is
determined by other economic trends,
such as population growth and
demographics, business investment
and productivity, government structural
policies , inflation/deflation, and the
health of banking/lending processes.
4.2. Economic Growth Trends
Trends are more easily forecast than
cycles, but there are always
uncertainties.
In practice,it is often difficult to know
which trends are most important.
Some trends or changes in trends are
by definition not open to forecasting.
4.2. Economic Growth Trends
Examples include wars that cause
market dislocations, abrupt changes in
government tax or trade policies, and
the sudden collapse in an asset market
or in an exchange rate.
Abrupt changes in trend affect the
paradigm of capital market
4.2. Economic Growth Trends
Paradigm-changing shock was the
revelation of accounting irregularities.
The expected trend rate of economic
growth is a key input in discounted
cash flow
models of expected return.
A higher trend rate of growth offer
4.2. Economic Growth Trends
A higher trend rate of growth is a
danger of inflation.
The trend rate of growth of the
economy is usually thought not to
change much over time.
4.2. Economic Growth Trends
The United Kingdom,appear that GDP
has a 2 percent to 2.5 percent trend
growth rate for two hundred years.
Most countries have had periods of
faster and slower trend growth during
their development.
4.2. Economic Growth Trends
The United Kingdom,appear that GDP
has a 2 percent to 2.5 percent trend
growth rate for two hundred years.
Most countries have had periods of
faster and slower trend growth during
their development.
4.2. Economic Growth Trends
Industrial countries have faster
growth.
But the more developed their growth
will slow.
Japans GDP has 11 percent in 20
years to 1973, in the next 17 years 3.9
percent and then fell to 1.6 percent
4.2.1 Consumer Impacts
Consumer Impacts is depend upon
consumption and demand.
Consumers are the largest source of
economic growth in developed and
developing
economies.
Consumers spend is depend in their
4.2.1 Consumer Impacts
Consumers spending behavior is
depend upon their long-run income
expectations.
Individuals demand is depend upon
ongoing series of incoming cash flows.
Individuals spending of the flows
would be ongoing and could be
4.2.1 Consumer Impacts
Reduce the income flows of
consumers, reduce the amount their
long-term spending.
Consumer trends are also business
cycle.
When incomes rise spending
increases.
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
The economys trend growth is split
into:
Growth from changes in employment
Growth from changes in labor
productivity.
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
For longer-term analysis, growth from
changes in employment is broken
down into growth in the size of the
labor force and the actual labor force
participation rate.
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
In U.S. GDP growth is 2.5 percent over
the long term.
In this situation 1 percent growth in
thelabor force, a 0.5 percent growth in
labor force participation, and a 1
percent growth in labor productivity.
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
Productivity had risen to 2.5 percent ,
so trend growth were raised to 4
percent .
Developing countries,2 percent labor
force growth, 1 percent growth in labor
force participation, and 3 to 4 percent
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
Annual growth 6 to 7 percent over a
long period.
Economic trend growth breaks down
the growth in labor productivity has
two components.
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
Productivity increases come from
investment in equipment or new
machines (growth from capital inputs)
and from growth in total factor
productivity (TFP growth), increased
efficiency in using capital inputs.
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
The trend growth in GDP is the sum of
the following:
Growth from labor inputs, comprising:
Growth in potential labor force size
and
Growth in actual labor force
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
Growth from labor productivity,
comprising:
Growth from capital inputs and
TFP growth (i.e., growth from increase
in the productivity in using capital
inputs).
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
TFP growth include technological
shocks and shifts in government
policies.
TFP is taken as a residual.
Fast-growing countries are successful
because they invest heavily and
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
Slower-growing countries are manage
capital investment rates .
Fast rates of economic growth is
higher rates of capital investment.
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
The rapid rate of investment , the
rapid growth in the economy has stock
market returns may not be strong.
Stock market returns depend on the
rate of return on invested capital.
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
If capital is growing fast, returns on
invested capital are driven down.
Economic trend growth rates in Japan
and Europe are low because labor
force growth slow as well as
population growth.
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
In U.S young population is high so
faster labor force growth.
Europe and Japan is achieve because
higher labor force participation rate.
If investment is strong , trend growth
will be boost.
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
The surge in economic growth in the
United States was higher investment.
When economic boom, higher stock
market valuations, and a high level of
investment in boosted productivity.
4.2.2 A Decomposition of GDP
Growth and Its Use in
Forecasting
Increase in productivity is greater TFP.
In Europe had not surge in
productivity. Investment has not
strong.
4.2.3Government Structural
Policies
Government structural policies is
government policies that affect the
economic growth and private sector.
The elements of a pro-growth
government policy:
4.2.3Government Structural
Policies
Fiscal policy is sound
Fiscal policy is sometimes used to
influence the business cycle.
Decreasing a budget surplus (or
increasing a budget deficit) may be
economic stimulus.
But countries are run large deficits tend
4.2.3Government Structural
Policies
Fiscal policy is sound
First, a government budget deficit often
brings a current account deficit which
means that the country must borrow
abroad.
Second, if the deficit is not financed by
borrowing, it will be financed by printing
4.2.3Government Structural
Policies
Fiscal policy is sound
Third, the financing of the deficit takes
resources away from private sector
investment.
It is for all these reasons the investors
see governments hold the budget deficit
close to zero over the long term.
4.2.3Government Structural
Policies
The public sector intrudes minimally
on the private sector
A completely unfettered competitive
market would supply the public goods.
The thrust of economic theory is
usually provides the right incentives to
individuals and businesses.
4.2.3Government Structural
Policies
The public sector intrudes minimally
on the private sector
Regulations tend to raise the structural
level of unemployment.
4.2.3Government Structural
Policies
Competition within the private
sector is encouraged
Competition is important for trend
growth because more efficient and
boosts productivity growth.
The reduction of trade tariffs and
barriers are important in increasing
4.2.3Government Structural
Policies
Competition within the private
sector is encouraged
Another positive government policy is
openness to foreign investment.
Competition makes difficult for
companies to earn high returns on
capital.
4.2.3Government Structural
Policies
Infrastructure and human capital
development are supported.
Building health and education
infrastructure has important economic
benefits.
4.2.3Government Structural
Policies
Tax policies are sound
Developed country governments
typically collect between 30 percent and
50 percent of GDP in taxes.
Sound tax policy involves simple,
transparent, and rarely altered tax rates;
low marginal tax rates; and a very broad
4.3 Exogenous Shocks
Exogenous shocks are events from
outside the economic system.
Exogenous shocks be discounted in
market expectations and prices.
Exogenous shocks may have short-
lived effects or drive changes in
trends.
4.3 Exogenous Shocks
Exogenous shocks come from shifts in
government policies.
Government impacts are swiftly felt.
Some shocks do not affect trends but
are felt in short-term manner.
4.3 Exogenous Shocks
The creation of new products, markets,
and technologies provide a positive.
It is longer-term impact on economic
trends.
Focus on shorterm benefits, evolving
the technologies are great positive
economic impact.
4.3 Exogenous Shocks
There are two types of economic
shock.
Oil shocks are important because the
price of oil reduces consumer
purchasing power and higher inflation.
4.3.1. Oil Shocks
Crises in the Middle East produce
spikes in oil prices.
Military conflicts that led to declines in
world production of oil occurred.
Oil is input to the world economy , rise
in prices affects consumers income
and reduces spending.
4.3.1. Oil Shocks
Inflation rates also rise, higher oil
prices restricts employment.
Declining oil prices, tend to effect of
extending the economic because lower
inflation.
Low oil prices and low inflation boost
economic growth.
4.3.1. Financial Crises
Financial crises affect growth rates
directly through bank lending or
indirectly through investor confidence.
Financial crisis was important because
threatened financial markets and
investment banks with collapse.
4.3.1. Financial Crises
The effect is subsequent collapse of
Long-Term Capital Management.
Among central banks, the U.S. Federal
Reserves response to the market
crises was proactive.
The Fed injected liquidity into the
system, reducing U.S. interest rates.
4.3.1. Financial Crises
The Feds response to interest rates
low for period to provide sufficient
liquidity tothe payment system is
continue.
That action more difficult in a world of
low inflation or deflation.
Financial crises are more dangerous in