Growth rates refer to the percentage change of a specific variable within a specific time period, given a certain context. For investors, growth rates typically represent the compounded annualized rate of growth of a company’s revenues, earnings, dividends and even macro concepts such as GDP and the economy as a whole. Expected forward-looking or trailing growth rates are two common kinds of growth rates used for analysis.
At their most basic level, growth rates are used to express the annual change in a variable as a percentage. For example, an economy’s growth rate is derived as the annual rate of change at which a country’s income increases or decreases. In fact, this rate of growth is used to measure an economy’s recession or expansion. If the income within a country declines for two consecutive quarters, it is considered to be in a recession. Conversely, if the country has a growth in income for two consecutive quarters, it is considered to be expanding.
Industry Growth Rates
In addition to macroeconomic growth rates, specific industries also have growth rates. Each industry has a unique benchmark number for rates of growth that its performance is measured against. For instance, companies on the cutting edge of technology are more likely to have higher annual rates of growth compared to a mature industry such as retail sales.
The use of historical growth rates is one of the simplest methods of estimating future growth of an industry. However, historically high growth rates do not always mean a high rate of growth looking into the future since industrial and economic conditions change constantly. For example, the auto industry has higher rates of revenue growth during good economic times, but in times of recession, consumers are more inclined to be frugal and not spend disposable income on a new car.
Specific Example of Growth Rates
Retail sales growth is one of the most important growth rates for an economy because it represents consumer confidence and customer spending habits. When the economy is doing well and people are confident, they increase spending, which is reflected in retail sales. When the economy is in a recession, people reduce spending and retail sales decline.
For example, second-quarter 2016 retail sales growth for Ireland was reported on July 20, 2016. It was found that domestic retail sales flatlined through the second quarter of the year. It is believed the political instability within the country, combined with the results of the Brexit vote on June 23, 2016, caused Ireland’s sales to stall. While some industries showed positive growth, such as agriculture and garden, other industries within the retail sector counteracted that growth. Fashion and footwear had negative growth for the quarter.