Important Economic Indicators to Understand the World Economy
There’s a mixed view on where the North American economy will go in 2020, due to growing global geopolitical issues. To add on top of the issues, there are even climate change issues to consider.
It may be overwhelming to focus on news articles that never seem to end, and concepts that are hard to understand, so let me guide you through the tough muddy waters of our world news today.
The world currently faces several uncertainties. Too many to list in full, but a few notable challenges include Trump’s Impeachment, the situation in Iran, Venezuela, Brexit, and the rise of China.
Managing Director of the International Monetary Fund, Christine Lagarde, warned in early 2019 that the world economy is in a “precarious” position. “We had this synchronized acceleration of growth a couple years ago,” Lagarde said. “Now it’s synchronized deceleration.”
Macroeconomic events are a fundamental source of changes in the business environment, markets, and society. These events are a reflection of how our society is working today.
Looking at Ray Dalio’s Linkedin Post, he explains the problems in our world today. Capitalism has helped many of us, but there are things done to our society that have hurt us.
Money is free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give. — Ray Dalio
Without understanding what’s going on in the world around us, we’re unable to make smart financial choices. The disparity between the rich and poor will continue to grow, and things will become unsustainable.
As the world grows more complex, people have more choices but will be more confused. Financial literacy is important, and it starts with understanding the world around us.
Although there is much to be said about these economic indicators, I’ve provided a simple summary of the most important and laid out the direct implications of certain metrics.
Everything in the World is Connected
Compared to the past, the world economy has become much more integrated. Globalization is the growing interdependence of the world’s economies, cultures, and populations. The U.S. led the efforts to revive international trade and investment after World War II.
Politics and business have now been integrated as well. Trump tweets change the world around us. An amazing resource has been created by Bloomberg, documenting and tracking Trump’s tweets and the impacts on the stock market.
Despite this, the issues we face today are a byproduct of the fast growth that the world has been experiencing. Certain countries are looking to protect their jobs and people, leading to trade wars and other political issues such as Brexit.
Important Concepts Broken Down
Interest Rates: Central banks around the world use interest rates to influence the economy. This is generally used to curb inflation. Different countries have different levels of inflation, and a higher interest rate slows down inflation.
Increasing Interest Rates > Economy is doing well > Inflation needs to be curbed > Signals a better economy
Inflation: The increase in prices of goods and services in an economy over time. High inflation means a decrease in the purchasing power of a nation’s currency. This concept is why things get more expensive over time, and your money buys less.
High inflation > Bad for consumers > Increase Interest Rates > Slow Economy
Unemployment: Employment data is a big economic indicator which indicates the well-being of the economy and labour force of a company. This indicator is heavily watched and talked about in the media, as generally the lower unemployment is, the better the economy is doing.
More people working > More spending > More economic growth > Better economy
Housing Starts: The amount of housing units on which construction was performed during the month. Generally data is provided for single-family homes and residential buildings. Housing is an essential good for consumers, and everyone needs a place to live.
More housing starts > More people buying homes > More disposable income > Better Economy
Consumer Confidence: Consumers are surveyed in a random sampling of 5,000 individuals, of whom 3,500 generally respond. This survey asks the consumers about their sentiment on the current economy, with topics ranging from the labor market, consumer spending, and economic growth.
Higher consumer confidence > More consumer investments and spending > Better economy
Stock Market Indexes: Indexes were created as a basket of stocks and have been the world benchmark for equity markets. There are indexes for each country, but the large ones are the S&P 500 (U.S.), Dow Jones (U.S.), TSX (Canada), FTSE 100 (London), Sensex (India) to name a few. With all things held equal, higher profits and good economic situations drive higher stock valuations.
Higher stock markets index values > Better performing companies > More investments and employment > Better economy
Real Gross Domestic Product: The Market Value of all goods and services produced in a nation during a year, net of the inflation in a certain country. This is generally used as a gauge of the health and well-being of an economy. When looking at this metric, you want to look at respective growth rates over each quarter. Higher the growth, the better.
Higher GDP > Countries are being productive > Better economy
Following this post, you will have more knowledge about economics and the world around us. Hopefully this can kick-start your interest in learning more about the financial world. Feel free to respond with any of your questions, and I will be covering more advanced topics later on.
For other analysis regarding our current economy:
REITs are a Strong Investment in This Economy — Here’s Why
Real Estate investing does not mean that you need to buy a building.