economy
What is base effect?
Nov 27, 05:11
Growth is always calculated over a base. For instance, to calculate earnings growth you divide the current figure over the year ago figure.
But an unusual element in the base can give a misleading result. A sharp decline as seen in COVID times or a one-off expense creates a low base effect while a spike in income causes a high base effect. Investors should adjust for this distortion to avoid erroneous conclusions.
For example, COVID's low base effect may buoy growth in the June and September 2021 quarters. Take them with a pinch of salt.
