GDP and Economic Performance | All News

USA, Europe, Japan: Analyzing real GDP per capita leads to different conclusions than analyzing nominal GDP.

GDP is a measure of national wealth generated by the economic agents of the country in question. Japan is suffering from economic stagnation in the sense that the amount of nominal wealth created in 2021 is about the same as the amount in 1997. The graph below shows the nominal GDP series in local currency.

Source: Marigny Capital, Bloomberg

From this angle, the difference in economic performance looks extraordinary, but in reality it doesn’t matter. Indeed, the nominal wealth produced can grow under the sole effect of rising prices for goods and services. Therefore, in an economy that produces the same amount of goods and services, but whose prices are rising significantly, nominal GDP will grow. This is called the money illusion. We believe that we are nominally rich in goods and services, but because the quantity does not change, we do not generate wealth.

Therefore, the idea of ​​deflate nominal GDP of price fluctuations is that actual growth is quantity, not value. With this adjustment, the differences between the series are less important. This cumulative and complex 2.5% annual difference is ultimately significant, as prices have fallen by an average of 0.5% annually in Japan and increased by an average of 2.0% in the United States since 1997.

Another tweak comes from the fact that generating 100 wealth with 10 resources is not the same as generating 100 with 8 resources. The second adjustment involves demographic factors. As a result, inferences in terms of real GDP per capita are a reference indicator of economic performance. The series is shown below.

The ordinate scale is intentionally the same for both graphs

Source: Marigny Capital, Bloomberg

The following graph summarizes combined annual growth according to three indicators: nominal GDP, real GDP, and real GDP per capita. It is easy to understand the importance of choosing indicators for analysis.

Source: Marigny Capital, Bloomberg

This result is challenging because, contrary to what the measurement of nominal GDP suggests, the per capita wealth gap between Japan, the euro area and the United States is not very large.

Two conclusions stand out.

First, vitality is an important factor in growth. Japan suffers from very strict immigration policies that impede the aging of its population and the growth of human capital. This story is well known. Not so much, this unfavorable demographic scenario is in the process of reaching the European and American ratings. Population growth has never been so slow in modern American history. Currently, it is growing at an annual rate of 0.3%, compared to 0.7% 10 years ago and 1.0% 20 years ago. There is no real growth in Europe anymore and the population is stable at 342 million (Eurozone). Therefore, potential growth in Europe and the United States is naturally weakening.

Source: Marigny Capital, Bloomberg

The second conclusion is about the external value of money, the currency. The theory is that economic agents (including investors) are not victims of the money illusion, so the inflation gap between the two countries is arbitrated in the form of depreciation of the national currency at the highest inflation rate (equivalent to the real interest rate). I’m teaching you that. Then, the nominal GDP brought back in the common currency should be comparable to the comparison of real GDP.

In reality, this economic theory has never been tested by facts. The US dollar has not fallen by an average of 2.5% against the yen since 1997, despite high inflation.

Today’s results are very spectacular. The dollar’s purchasing power remains very high, but the yen’s purchasing power is the lowest (lower right graph).

Source: Marigny Capital, Bloomberg

Can the current episode of inflation change the state of the dollar? Are we in the process of depreciation of the dollar after the last decade of continuous appreciation? I need to ask a question.