Zoilo “Bingo” Dejaresco III l March 7, 2024 l Manila Bulletin
IS THERE A strong correlation between the global economic GDP performance of nations and their stock markets?
The year 2023 saw many economies slipping into “technical recession” (two successive quarters of negative growth rates). Several others exhibited shrinking GDP values in absolute amounts.
China, the world’s second largest economy was earlier said to be in the stage of “stagflation” (weak demand amidst adequate supply) pestered by a collapsing real property markets and anemic business confidence. It’s 2023 (below 5 percent GDP growth rate) is a pittance compared to the over 10 percent GDP increase in those previous China’s rah-rah years.
Nikkei Asia reports that the People’s Bank of China, in fact, reduced its 5-year long term rate from 4.2 percent to 3.9 percent.
Even the IMF (International Monetary Fund) also reduced its previous outlook to a 2.9 percent in global economic growth for 2024 with the spike in emerging markets brought down by the bigger tepid performances of major economies JAPAN.
Japan’s economy contracted consecutively: (4Q 2023) -0.4 percent and (3Q 2023) of (-3.3 percent) showing another likely slowdown entry in 1Q 2024. As a consequence, Japan has just lost her No. 3 position in the global economy ranking (GDP of $4.21 T) to Germany of ($4.46 GDP) in 2023.
Somewhat like China, Japan is also facing a frail consumption appetite and weakened capital spending propensity.
Bank of Japan, thus, hesitates to increase interest rates realizing its negative impact in a technical recession on an already ailing economy. In fact, Japan’s 10-year bonds slipped by 4 basis points recently to 0.715 percent.
EUROPE AND OTHERS
Another huge economy, the U.K., has been soundly criticized by some of its citizens for continuous financial support to Ukraine despite its falling likewise into a technical recession.
The whole EU itself is also in a technical recession with GDP growth affected negatively by high interest rates that bear down on consumption and investment patterns coupled by tight fiscal spending.
Business Insider says that while EU may achieve it targeted control of inflation to 2 percent -the risk of suffering a “China Syndrome” of stagflation looms likewise in the EU. More than 50 percent of European chief economists believe there will be global weakening of nations in 2024.
There was zero growth in EU’s overall GDP as of (4Q2023) and Germany, its most powerful economy, contracted (-0.3 percent) in that same period. Per Yahoo, the EU is watching the US polls and sees a Trump return as furthering the evil cause of Russia in EU as Trump earlier warned that NATO nations who are not spending enough on defense will not be defended by NATO allies when attacked.
Other nations likewise already in technical recession are, Denmark, Luxembourg, Moldova and Estonia while shrinking GDPs have been observed in Ecuador, Bahrain, Iceland, South Africa, Canada and New Zealand. It is quite pervasive.
The US economy appears doing relatively well (and might save Biden’s falling destiny) even if the Fed is apparently fanning inflation fires with high interest rates likely till year-end.
However, Morgan Stanley’s Chief US economist opines that the full impact of the last interest rate hike will be felt fully only 18 months down the road. The Chief Investment strategist of B. Riley Wealth predicts that even a mild US recession can plunge the stock market by as much as 40 percent because he believes stocks are highly overvalued today, “reminiscent of the 2001 dotcom wave.”
Business Insider quoted a top economist as saying that the huge cash pile of Warren Buffet’s Berkshire Hathaway and its recent sale of more than $100M of Apple shares could be indications that it feels “stocks could slide and recession is on the way.”
RECESSION FORECASTS
A “Full Model” theory and the “Yield Curve” theory are now in the battleground as to whose crystal ball is clearer.
In a report in Business Insider, economist David Rosenberg, using the “full model”, predicts an 85 percent recession probability in 2024. This model is based on the Bureau of Economic Research data including (1) financial condition indexes, (2) debt service ratio, (3) foreign term spread and (4) level of yield curve. This 85 percent probability is the “highest reading since the 2008 great financial disaster.”
The “Yield Curve” model, on the other hand, is championed by, among others, Campbell Harvey, who postulates recension is in the offing when “short term treasury yields are above long-term bond returns.”
While “yield curve” theorists predicted a 50 percent chance of recession in 2023, the “full model” only forecasted a 12 percent probability. The “Yield Curvers” insist that the 15 months delay in their forecasted arrival of recession does not mean their forecast is false. It only means ” the recession is delayed but not derailed and is still running at high speed.”
Enough of crystal balls?
STOCK MARKETS
Yet, surprise of surprises, amid all these doomsday predictions, stock markets all around the globe appear robust. Contradictions?
According to a Reuters Report, the Standard and Poor 500 ended with a record high of 5, 087.53 and Dow Jones Industrials hit 39,069.11 at end 2023 (the first time it reached 39,000 level) even as the NASDAQ almost did a record finish- all buoyed up by growth and technology firm performances.
Even Japan’s Nikkei Index registered at 39,098.69, (23 percent hike from a year previous) the highest since 1989 and the best stock market performer in the Asian region.
To be fair, however, there are really numerous other factors that affect GDP and stock market performance other than just each other directly.
Our favorite financial future guru TS (as in Totally Savvy), however, sees a 2024-2025 global meltdown. But never mind that because our guru plays both sides and wins – in a bull or bear market.
For the Philippines, the economy hiked to a 5.6 percent GDP growth rate (one of the highest in Asia) even as the Philippine Stock Market dove 1.1% in end 2023 from 2022 to 6,470.04 points. No correlation? Note that the Philippine economy is structured differently from others.
For instance, the country, as we know, has not been directly at the mercy of external forces- its economy being basically beefed by intense local consumption, remittances and government spending.
Who’s afraid, then, of the Recession Wolf (with apologies to Virginia) here?
*** (Bingo Dejaresco, a former banker, is a financial consultant, media practitioner and author. He is a Life and Media member of Fibex, His views here, however, are personal and do not necessarily reflect those of Finex. dejarescobingo@yahoo.com). Photo from Pinterest.