Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 179

Benign economic growth but what about shares?

Global economic growth is expected to be around 3% in 2016 (about the same as in 2015) and then at least another 3% in 2017. These growth rates are near long-term growth levels, and indicate quite benign outlooks. Growth expectations have been revised downward a little over the past year, mainly in response to the ‘Brexit’ vote at the end of June 2016. The following charts show economic growth rates and outlooks in major regions and countries, based on IMF numbers.

In the major economies:

US growth is expected to remain at between 2% and 3% pa. There are continuing improvements in the housing market driving construction, employment and consumption. Manufacturing industries are also being boosted by cheaper energy, lower wages and higher productivity. This growth is more than making up for the fiscal tightening in the government sector, with trillion dollar deficits reducing to less of than half of that level.

European growth will continue at sub-3% for some time, driven mainly by Germany and also by the PIIGS as they recover from their deep recessions. The main risk to growth is deflation and the ever-present risk of a major banking crisis at the core, especially in Germany.

Japanese ‘Abenomics’ policies worked well in 2013-2015 in depressing the yen and boosting share prices, but did nothing to improve overall growth nor to get inflation into consistently positive territory. The economy is still very weak.

Chinese growth rates peaked in 2007 and have been declining ever since. The government is committed to propping up growth with ever-more debt to political pet projects to keep the population employed and quiet. As bad debts build up in the state-controlled banking sector and privately funded ‘shadow banking’ sector, and property prices continue to sky-rocket, the next credit collapse is bound to happen sooner or later. However, the government is in a relatively good position to restructure banks, demand and employment, just as it has done in the past.

All of this refers to economies but that has little bearing on share prices as we shall see.

No relationship between economic growth and stock market returns

One of the main problems with the traditional top-down approach to assessing the outlook for stock markets is that it assumes that economic growth drives earnings growth and that earnings growth drives stock prices (or at least that expectations of economic growth and expectations of earnings growth drive stock prices), or perhaps even that expectations of economic growth drive stock prices directly.

None of these assumptions hold true very often. There is no meaningful statistical correlation between economic growth and stock market returns, either at a global level or in individual countries. We consider the global picture first, since economies are highly interconnected and stock markets are also highly correlated.

Only rarely does above average world economic growth coincide with above average stock market returns. In only 2 years in the past 32 years since 1980 has this been the case – 1988 and 2006.

Also, in only 4 years has below average economic growth coincided with below average stock market returns – 1981, 1990, 2001 & 2002.

In fact at least half of the time when economic growth was above average, stock market returns were below average, and at least half of the time when economic growth was below average (including in recessions), stock market returns were above average.

This can be seen in the following chart of world real GDP growth and world stock market total returns in each year since 1980 (and the orange line shows changes in the most recent years):

global-shares-vs-economic-growth-since-1980

Most experts expect years in top right or bottom left quadrants

If there was any consistent positive relationship between economic growth and stock market returns, most years would be either:

  • in the top right segment (good economic growth coinciding with good stock market returns)
  • or in the bottom left segment (poor economic growth coinciding with poor stock market returns).

But this is not the case in the real world. At least half the years turned out to be good for economic growth but not good for shares (bottom right section) or bad for economic growth but good for shares (top left section). There is a similar story when looking at cross sectional returns in individual countries in any particular year, and this is also the case so far in 2016.

Despite the global gloom and growth downgrades this year, stock markets in most countries are doing quite well, with three straight months of gains since the ‘Brexit’ panic at the end of June.

I have observed over many years that dire warnings about economic slowdowns from esteemed bodies like the IMF (most recently after the Brexit vote) are often followed by share price rallies, and bullish statements about economic growth (notably at the tops of boom) are often followed by share price collapses. A further problem with the economic top-down approach is the fact that economists never forecast recessions and they are notoriously late in recognising them when they do occur. When the numbers are broken into countries, those with the best stock market returns this year are where the recessions are the deepest.

Conclusion

There is no reason the lowering of economic growth outlooks this year – notably following the Brexit vote – will lead to lower share prices.

We should not blindly assume that high/improving (or low/deteriorating) economic growth rates will lead to or accompany good equity returns (or poor returns in the case of low/deteriorating economic outlooks), as most market economists and commentators do.

 

Ashley Owen is Chief Investment Officer at independent advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is for general information and does not consider the personal circumstances of any individual.

 

  •   27 October 2016
  • 5
  •      
  •   

RELATED ARTICLES

Global market growth hinges on Iran War and AI rollout

Checking in on the equity market's silent engine

banner

Most viewed in recent weeks

The strange effect of the 30% minimum capital gains tax

The 30% minimum tax on capital gains sits at the heart of the budget's proposed reforms. Yet the mechanics reveal anomalies that introduce unexpected distortions that raise questions about its design.

High quality businesses are on sale

Beneath the dominance of the ASX's largest stocks, much of the market has been left behind. High-quality companies are now trading at levels rarely seen, offering opportunities for investors willing to look deeper.

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Welcome to Firstlinks Edition 667 with weekend update

The downfall of the giant and three lessons for investors.

  • 18 June 2026

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Latest Updates

Superannuation

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Retirement

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

Taxation

The missing link in the CGT debate

A little-noticed consequence of Labor’s tax changes could have implications well beyond investors’ tax bills. The issue raises bigger questions about incentives, capital allocation and the drivers of long-term economic growth.

Investment strategies

The surprising beneficiaries of the AI boom

While markets obsess over AI winners, a larger, more predictable growth engine is forming. A surge in electricity demand and infrastructure build‑out reveals the quiet, durable assets evolving beneath the AI story.

Superannuation

When losses in super become irreplaceable

The notion of 'you can afford more risk' assumes that losses can be replaced. Above a $2.1 million super balance the law says otherwise, and a worked example shows the refill takes decades, or never happens.

Retirement

Why I object to ‘hitting a number’ for retirement

Many investors dream of “hitting their number” and walking into retirement. But what if reaching that milestone is the moment they should be asking the tough questions? After all, there's a lot more to life than a high portfolio value. 

Planning

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.