Is the era of supernormal growth for Google Inc over?

The phenomenal growth witnessed by Google Inc during the start of this decade is gradually slowing down. Google’s revenues had jumped 250 times in 7 years from 2001 to 2008 showing a compounded annual growth rate (CAGR) of 120%. The profits even fared better with the net profits in 2008 being more than 600 times the net profits in 2001 – a CAGR of 150%. However, Google’s revenue growth rate has been slowing down as its size is increasing. The annual growth rate which was more than 400% in 2002 has gradually fallen to about 30% in 2008 and in the first half of 2009 the growth rate was in single digit.

Has Google’s growth matured? Is Google’s supernormal growth phase behind us? It is quite possible as suggested by the trend in the growth rates. Google is now one-third the size of Microsoft and one-fifth of IBM. For a company that was incorporated only 11 years ago - growing to such a size is amazing. Continuing to show such phenomenal growth is not sustainable in long term. If Google can grow by more than 25% in next 4-5 years it would be a significant achievement. A growth rate more than that will require entering into other related businesses. Google has done it in past and is very capable of doing it in future. With plans of entering into the Operating System business which has Microsoft's dominance, Google has a huge potential opportunity which if it can unleash will help it grow even faster.

Huge write downs (~ £21 billion) waiting for Lloyds Banking Group

Lloyds Banking Group plc (erstwhile Lloyds TSB Group plc) is expected to write off as much as £21 billion of bad debt from its books in the year 2009. The H1 2009 (Jan – June) results which are likely to be declared by July end or early August are expected to show more losses than in the previous year same period. The losses will be mainly because of the high provisions which the bank is expected to make. According to an estimate the write-offs to be made in the H1 2009 will be more than that made by HBOS and Lloyds TSB combined in 2008. The huge write down in one of the biggest banking group of United Kingdom (UK) indicates that the banking system is yet to stabilize.

The UK Government has invested £50bn so far in Lloyds and RBS, but that could rise when Lloyds joins the asset protection scheme. At present, the state's stakes are worth £7.5bn and £14.3bn. Notably, UK Financial Investments (UKFI), the agency that manages the stakes for the Treasury, holds a majority stake in the company (43 per cent of Lloyds) following the government support. This holding could rise even higher, as the bank issue shares to insure its bad loans with the Government. However, the Treasury is hoping that it can recover its investment, although it may have to wait for some more time. When things will improve, UKFI plans to sell its stake and return the bank to the private sector. Any such share sale will have to be spread over several years in order to prevent huge share inflow into the system.

In 2008, Lloyds had acquired HBOS for about £12 billion. The deal was backed out by UK government to prevent collapse of the banking system. However, Lloyds shareholders saw wealth erosion after a £15 billion 'black hole' was discovered in HBOS accounts. Many of the Lloyds shareholders’ are skeptical of a possible government-bank nexus behind this deal as they lose a huge portion of their holdings (about 85 per cent). Furious Lloyds shareholders have demanded transcripts of secret negotiations between Mr Brown and the bank's chairman Sir Victor Blank last July and September.

About Lloyds Banking Group plc

Lloyds TSB Group plc was renamed Lloyds Banking Group plc on 19 January 2009, following the acquisition of HBOS plc. The group owns the Lloyds TSB brand which is one of the largest retail bank in the UK brand and came into existence in 1995 by the merger of Lloyds Bank and the Trustee Savings Bank (TSB Bank).

Under the UK government Asset Protection Scheme announced on March 7 Lloyds has to provide a total of £14 billion of additional lending in the period up to 1 March 2010 to boost the spending and investment activities which could be vital in avoiding a prolonged recession.

A bit of history of economic crises

The current crises got me looking into the other economic downturns in the 20th century. Here are my findings:
We all know about the great depression in the early 1930s, but I was actually surprised by the number of recessions in the world since. Here are the major ones:

1. Latin America's woes
Latin America has long endured economic problems like currency crises, hyperinflation, banking failures etc. The lack of prudent governance and macroeconomic populism continued till 1980s, when the economic reforms were introduced. These measures included:

• State - owned firms were privatized
• Import restrictions lifted
• Budget deficits trimmed, inflation became a priority

These measures led to efficiency, investor confidence and large inflows of money. But soon there was a recession in Latin America (esp. Mexico and Argentina) in 1990s, the exact reason for which is still not understood well by economists. Some of the causes were:

• Impending devaluation of Mexican pesos not handled well
• High government spendings and
• Wide spread corruption and dollar-loan exposure

This crisis was finally controlled by huge loans provided by the United States, Canada, and International Monetary Fund(IMF).

2. Japan's downturn
Japan suffered laggard economic growth and recessions in the most of the 1990s (also known as the lost decade. The crisis started in Japan in 1989-90 and the reasons were:

• Loose financial regulation, bad debts.
• Bubble in stock markets and real estate from 1986-1990

Japan has suffered economic paralysis for such a long time. The country's economy was investment driven and this recession caused investments to flow outside the country. The falling interest rates (at one point the interest rates were zero also) inhibited spending. This low consumption led to a deflationary spiral which was only strengthened by rising unemployment levels. The central bank has also dithered far too long where it alternated between public spending and budgetary control.

3. South East Asia's crash
South Asia till late 1990s was a tremendous success story. The region saw extended economic growth and was a role model for many. All that changed in 1997 when the many south Asian economies were caught in a currency crisis: Thailand, Malaysia, Indonesia and South Korea to be precise. Again economists disagree over exact reasons for this crisis, generally the following factors are considered to be the culprit:

• Started with currency collapse of Thai Baht, which was long under attack from speculators and hedge funds. Government finally floated Baht leading to its fall.
• Crony capitalism where in these economies there was a collusion between government and big business players.
• These economies had relatively free markets and light regulation, which led them vulnerable to the vagaries of foreign investors.
• This crisis led to slumping currencies, stock market devaluations and precipitous private debt

4. Internet bubble of the 21st century
Also known as the dot com bust, happenned in 2001. There was a considerable bubble in the stock markets of western economies from 1996-2001. The bubble was caused by inflated valuations of stock markets, especially internet and technology related firms. These firms in turn had flawed business models, where in all of them were rooting for growth over profits working under the assumption that finally profits will come once the markets are captured.