The macro economy is the overall economic environment n which all firms operate. The key variables commonly used to describe the state of the macro-economy are:
(1) Growth rates of gross domestic product
(2) Industrial growth rate
(3) Agriculture and monsoons
(4) Savings and investments
(5) Government budget and deficit
(6) Price level and inflation
(7) Interest rates
(8)Balance of payment, forex reserves and exchange rate.
(9) Infrastructural facilities and arrangements
Growth Rate of Gross Domestic Product (GDP):
The gross domestic product (GDP) – or some variant of it, like the gross national product (GNP) is a measure of the total production of final goods and services in the economy during a specified period usually a year. The GDP of the Indian economy for the fiscal 2002-2003 was estimated at Rs 2.47 million crore in current rupees.
The growth rate of GDP is the most important indicator of the performance of the economy. The average rate of GDP growth in India during 1950 to 1980 was around 3.5 percent in real terms (the real growth rate is the nominal growth rate less the inflation rate) with wide year-to-year fluctuations though. The GDP growth rate had risen to about 5 percent in the decade of 1980s. The GDP growth rate during the decade 1995-2004 averaged 6.2 percent with yearly rates ranging from 4.2 percent in 2001 to 8.2 percent in 2004. The general view among economists is that in the next 5 to 10 years, the GDP growth rate in India of 7 percent may be achievable with some improvement on the policy side and easing of infrastructural bottlenecks.
Firm estimates of GDP growth rate are available with a time lag of one to two years or so, but preliminary estimates are made from to time by various bodies like CMIE, NCAER, and RBI.
The higher the growth rate of GDP, other things being equal the more favorable it is for the stock market.
Forecasting the GDP Growth Rate:
A commonly employed procedure for forecasting the GDP growth rate is to (1) estimate the most likely growth rates of three sectors of the economy viz., agriculture, industry and services and (2) calculate the weighted arithmetic average of the three rates, the weight of a sector being its share in the GDP. For example if the most likely growth rates of agriculture, industry and services are 2.0 percent, 8.0 percent and 9.0 percent and the shares of these sectors in the GDP are 0.25,0.25,and 0.50 the GDP growth rate forecast would be:
0.25 (2.0) + 0.25 (8.0) + 0.50(9.0) = 7.0 percent.
Professional economists, however find this procedure simplistic and unsatisfactory as it does not build on the fundamentals that drive a country’s economic performance mad ignores the close inter-linkages among major parts of the economy. Not withstanding this criticism for short time horizon of a year or so, a forecast derived from a simplistic method described above may not be inferior to a forecast based on underlying economic forces.
Industrial Growth rate:
The GDP growth rate represents the average of the growth rates of the three principal sectors of the economy, viz., the services sector, the industrial sector, and the agricultural sector.
Publicly listed companies play a major role in the industrial sector but only a minor role in the services sector and the agricultural sector. Hence stock market analysts focus more on the industrial sector. They look at the overall industrial growth rate as well as the growth rates of different industries.
The higher the growth rate of the industrial sector, other things being equal the more favorable it is for the stock market.