The stock market is influenced by a variety of factors, including the overall economy of the particular country. Understanding how macroeconomic issues affect the stock market is critical for investors looking for trustworthy investment advice. The following article will look at the relationship between key economic conditions and stock market performance.

Gross Domestic Product (GDP) Growth:

The GDP growth rate is a good indicator of economic health. A healthy economy with substantial GDP growth usually leads to excellent stock market performance. GDP data is closely monitored by investors because it indicates general economic activity, consumer spending, and business investment. When GDP growth exceeds estimates, investors gain confidence, which leads to increased stock market participation. The below shows the correlation between GDP and Stock Market. (Sensex)

Data Source: BSE, World Bank

Interest Rates and Monetary Policy:

Central bank interest rates have a considerable impact on borrowing costs, spending habits, and investment decisions. Lower interest rates increase borrowing and stimulate economic activity, which benefits businesses and stock values. Higher interest rates, on the other hand, can limit borrowing and economic growth, thereby affecting stock market performance. Investors pay close attention to central bank decisions and monetary policy choices for signals about future movements in interest rates. In the below graph we can clearly see that in 2020, when interest rates were decreased the stock market started booming.

Data Source: BSE, RBI

Inflation and Consumer Price Index (CPI):

The Consumer Price Index (CPI) measures inflation, which is the increase in the average price of goods and services over time. Moderate inflation is generally regarded as beneficial to the economy and stock market. Rapid or excessive inflation, on the other hand, erodes purchasing power, raises production costs, and can cause market volatility. Inflation patterns are closely monitored by investors because they affect interest rates, company profitability, and investor sentiment.

Data Source: BSE, MOSPI

Unemployment Rates:

Unemployment rates provides information about labour market circumstances. Low unemployment and strong job creation suggest a thriving economy, increasing consumer spending, and better company profitability. Positive employment trends are often linked to stock market gains. Rising unemployment rates and job losses, on the other hand, can impede economic growth and lead to market downturns.

Trade and International Relations:

International trade is critical in today’s globally interconnected economy. Trade regulations, tariffs, and geopolitical events can all have a substantial impact on stock markets around the world. Trade discussions, agreements, and conflicts are closely watched by investors because they can have an impact on supply chains, business earnings, and market sentiment. Because of the global economic interdependence, it is necessary to comprehend international relations and their possible impact on stock market performance.

When Russia invaded Ukraine, Global trade of crude and few other commodities were affected and this in turn impacted the stock market.

Fiscal Policy and Government Spending:

Government spending, taxation, and fiscal stimulus measures all have an impact on economic growth and stock market performance. Expansionary fiscal policies, such as greater government spending and tax cuts, can improve economic activity while also increasing company earnings and stock values. Contractionary fiscal measures targeted at lowering budget deficits, on the other hand, may have a temporary impact on specific sectors or industries. Investors keep an eye on government budgets and fiscal policy decisions to see whether there are any potential investment possibilities or hazards.

Conclusion

Understanding the relationship between macroeconomic issues and stock market performance is critical for investors seeking to make sound decisions. GDP growth, interest rates, inflation, employment trends, trade dynamics, and fiscal policies all have a significant impact. Investors may navigate fluctuations in the market and position themselves for long-term success by remaining informed about macroeconomic variables and their impact on the stock market.

Remember that, while macroeconomic indicators can provide useful information, individual company analysis, industry-specific concerns, and risk management are all important in making informed investment decisions.

Author: Kevin Jose

India’s economy is thriving despite the difficult economic environment across the globe. According to a recent Bloomberg survey, there is very little likelihood that India would experience a recession in 2023. However, the likelihood of a recession in nations like the US and the UK is higher, with probability ranging from 50% to 75%. Meanwhile, Germany has already slipped into recession with 2 consecutive quarters of negative economic growth. This indicates that India’s economy is performing remarkably well compared to other nations, demonstrating its strength and adaptability on the international stage.

Let us take a look at the positive and challenging factors that have contributed to the positive outlook of the Indian economy:

Strong domestic demand:

Strong domestic demand supported by a young and expanding population, powers India’s economy. The US, Germany, and the UK economies, in contrast, rely heavily on exports, which have been hurt by the global slump.

Consumer spending accounts for over 60% of total spending in India, making it the largest component of GDP. Increased consumer spending contributes to economic growth.

Demographic Dividend

India will benefit from its demographic dividend as a result of its sizable working-age population (15 years – 64 years). India’s young and expanding population boosts its economy, in contrast other developed nations that are dealing with ageing populations and shrinking workforces. This stimulates economic growth by boosting consumer demand for products and services, raising incomes to reduce poverty, and enhancing healthcare and education. India’s favourable demographics provide it a significant edge over other developed countries, even though they do not protect against recessions, and this fosters a positive economic perspective.

India would continue to be the world’s largest provider of human resources. India will account for around 24.3% of the incremental global workforce over the next decade. Currently India has a working age population of 67%, which higher than that of US and Europe.

Image Source: EY

Resilient Financial System

The Indian financial system is relatively shock resistant. This is due to a variety of factors, including high capital buffers and low non-performing loans. In comparison, the financial systems of the United States, Germany, and the United Kingdom are more vulnerable to shocks.

The banking system in India has a capital adequacy ratio of 13.3%, which is significantly higher than the regulatory requirement of 9%.

Fiscal flexibility

India has fiscal flexibility, which means that it can spend more to stimulate the economy if needed. A higher budget deficit enables the government to spend more on public investments, social welfare initiatives, and infrastructure development, which can stimulate the economy and increase growth.

However, a higher fiscal deficit can also result in an increase in public debt. Higher interest payments may follow, squeezing out investment and potentially contributing to financial instability.

If you look at the below graphs, you can notice that India has not been reducing its fiscal deficit as aggressive as Germany or the US. This in a way contributes to better economic growth.

Data Source: Trading Economics

Higher base line GDP Growth

Recession is defined as 2 consecutive quarters of negative economic growth. Countries like Germany has a base line GDP growth rate in the range of 2-3% and hence their growth is more prone to slip into the negative range.

But India has a baseline growth rate in the range of 4-7%. So, a negative growth rate is mostly not possible for an emerging market like India. Even if GDP contracts, it will most likely remain in the positive range.

Inflation Basket Mismatch

Real GDP = Nominal GDP – Inflation

CPI is the most popular metric used by countries to indicate the level of inflation in their respective countries. After the onset of the Russia-Ukraine war, inflation spiked in various countries. Germany witnessed an inflation of 9% which is 4.5 times more than its baseline inflation levels.

India also saw an increase in inflation. However, India’s inflation remained constant with respect to its baseline inflation. This is mainly because of the mismatch of the basket of components used for calculating CPI in various countries.

In the below graphs we can see that in India’s CPI, Housing only accounts for 10%, whereas in the US, it accounts for 36%. This mismatch maybe one of the reasons why India’s inflation did not show huge increase when compared to countries like the US or Germany.

So lower inflation results in higher real GDP, in paper at least.

Data source: RBI, BLS

Conclusion

In conclusion, despite global economic challenges, India’s economy has performed well in comparison to other countries. A young population’s robust domestic demand, a stable banking system, and budgetary flexibility have all contributed to India’s upbeat outlook. Despite limitations about the method by which inflation is computed, India’s favourable demographics and economic resiliency point to a promising future for continued growth.

Author: Kevin Jose

Title Image Source: IBEF