GDP stands for Gross Domestic Product. It represents the total value in the respective country currency of all goods and services produced over a specific time period. GDP is calculated will not be discuss here because that is kind of complicated. We will let those economist to do their job. What really important about GDP is, it help investor to tell how well a country is doing or how healthy is the economy.
GDP is usually expressed as a comparison to the previous GDP value in percentage. That is called “GDP Growth Rate”. It is either based on yearly or quarterly. For example 3% GDP growth rates in 2010 means the economy grows by 3% as compared to 2009. On the other hand, –3% GDP growth rates means the economy declines by 3%
What is recession?
When GDP growth rate is negative for 2 or more consecutive quarters, economist calls that as “Recession”. Let’s look at Malaysia GDP growth rate below, we’re having recession in the early of 2009.
Now, let’s look at the KLCI index below. Do you see the similar trend with the GDP growth rate?
It basically tells you that when recession happens, stock market crashes. Usually significant change in GDP growth rate will affect on the stock market. Investor look at the GDP data very closely to understand the current economy situation and then react to their investment’
Given all these high-level explanation of GDP, what is your take away? For me, I use the GDP growth rate as a recession detector. When recession happens (i.e. 2 consecutive negative GDP growth rate), I will quickly withdraw my investments and then watch out the GDP growth rate very closely when the economy will recovered. When it happens or when I think when it will happen (i.e. economy start to recover), I will start investing again. :)
P/S: For most updated Malaysia GDP report, you can refer to www.statistics.gov.my.