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Australia’s most recent GDP figures (for 4Q22) were released on Wednesday. Investors’ response was nuanced, with the ASX 200 only closing the day 0.09% lower than it had begun.
Why is GDP something to keep track of and what do the latest figures mean for stocks?
What is GDP?
First of all, it is important to recap what GDP is. GDP (short for Gross Domestic Product) is a measure of the overall economic output of a country. It is calculated by adding up all of the value produced in a given period, usually a year.
GDP measures how much value has been created from the production and sale of goods and services within the country’s borders, including consumer spending, business investments, government spending and net exports.
GDP provides an important indicator of economic health, as well as providing insight into current economic trends.
Generally speaking, higher GDP indicates that a country is doing better economically compared to other nations with lower GDPs.
A lower GDP can indicate slow or negative economic growth over time and can have significant implications for investment, employment and consumer confidence.
So what did the latest figures show?
The headline GDP figure was 0.5% growth during the last quarter (4Q22). At first glance, this figure may seem good – or at least better than negative growth.
However, there were a few things in the result that were concerning.
First, the result was weaker than economists had predicted. Second, the result was driven primarily by exports, particularly international students returning to Australia.
Third, even though consumer spending increased, there were warning signs that this could slow down. In particular, the household saving ratio was just 4.5%, a fraction of the 23.5% peak in the early years of the pandemic.
Fourth, the result was hindered by inventories (which subtracted 0.5% from growth) as well as a fall in home building and stamp duty revenues (shedding 0.2% off activity).
All of these indicate that the economy isn’t in as good a shape as the headline figure of 0.5% growth indicates. They also point to weaker GDP growth in the coming quarters.
So what does weak GDP growth mean for stocks?
In general terms, slow economic growth can lead to decreased consumer spending, reduced corporate profits and a lower demand for stock trading.
This can cause the stock market to become volatile due to lack of investor confidence, high uncertainty around investments and potentially an overall decrease in value of stocks.
In addition, slower economic growth usually leads to increased unemployment and deflation which can further damage businesses’ profitability.
Ultimately this could mean people have less money to invest in the stock market meaning it becomes harder for companies to raise funds from equity markets.
Additionally, slower economic growth means companies will be investing less into research & development so their long-term prospects might suffer.
Such issues all have an effect on stocks meaning slow economic growth is generally bad for them.
Can you still make money when economic growth is weak?
There will always be opportunities for investors, although they will be harder to find when GDP growth is weak.
Investors need to search for stocks that can perform in all economic conditions.
How can they tell that a stock could perform in periods of weak GDP growth?
The best way is past performance, especially if the business has been in existence through several economic conditions. Although of course, this is no guarantee.
It will also help if investors look towards specific sectors that are essential purchases for households and businesses, rather than discretionary.
With these things in mind, it is still possible to pick winning stocks when GDP growth is weak.
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