The stockmarket and the economy

When the Philippine stock market boomed a few months ago, some politicians commented that the boom is not reflective of the "real" economy, and is not affecting the majority of the people, especially the poor. Some of these politicians have adequate education and a good understanding of economics, so it must be just for "pogi" points that made them make such sweeping statements to the media.

The government did not claim that the stock market boom was the total solution to our economic problems. It was just predicting that better economic conditions may be forthcoming, as the stock market is a "leading" indicator of economic conditions.

In Macro-economics, there are statistics or indicators that tell us of the past, present, and future economic conditions. The annual GNP and GDP growth rates tell us of the increase in the value of goods and services produced by the country from year to year; this is called a "lagging" indicator. Volume and Value of Production Indices, which are tracked monthly, are indicators of a more current economic condition, as they tell us of the sales of businesses in both quantity and peso value monthly. This is still a lagging indicator, but a better indicator of business sentiment as monthly sales figures give business a better feel of where the economy is going.

The behavior of the stock market, on the other hand, is one of the "leading" indicators that tell us of the expectations of businessmen on the direction of the economy. It is the combination of the calculated forecasts, the gut feel, the sales experience, and the guesses of business people; so that it makes them buy or sell stocks in the stock market. The stock market is a 12 to 18 month-leading indicator, so the effect of the market to the total economy would be a year later.

The current behavior of the stock market, which has been generally bullish, (i.e. increasing in prices and volume), with regular price corrections, indicates that the Philippine economy is growing and will continue growing. That the market has not increased dramatically, as it has in China, indicates that we will also not have the double-digit growth of our economy that China is having. The recent first quarter GDP and GNP figures released have borne this out. While the economy grew 5.4% in the first quarter, it may not be sustainable for the rest of the year or next year because of the high oil prices, and other economic and political issues. Nevertheless, we are looking at an economic growth rate of between 5% to 5.5% this year and the next.

Definitely, the stock market boom will not affect immediately the greater portion of the people. Those who will be immediately positively affected will be the stockbrokers, the investment companies, the insurance people, the banks, and the investors. But a continued upswing in the market for six months will positively affect the manufacturing, the construction, and other service sectors as the additional investment in the market translate into real investments and increases in production. More employees will be hired and more materials will be consumed due to higher investments and production.

After another six months of a booming stock market, the rest of the economy will be positively affected as additional purchasing power will filter down to all sectors of the economy. More food, more materials and more services will be needed as the economy moves into a higher plane or a higher equilibrium level. This is the "virtuous cycle" of the economy that we want to achieve, as increasing production leads to increasing purchasing power, that leads to more investments, leading to more production, and so forth, spiraling upward to a new level of equilibrium.