The Stock Market is not the Economy

This might be a puzzle to many. How can the JSE All Share Index cross 96,000 points for the first time in the same week when the latest data indicated the South African economy only grew 0.1% in the first quarter?

We can expand the question globally. Why are equity benchmarks in countries like Canada and Germany – both big exporters to the US – hitting record highs while global economic growth forecasts are being downgraded because of US trade policies?

Chart 1: FTSE/ JSE All Share Index

Source: LSEG Datastream

Let’s start with the global picture. Of course there is never just a single answer, but rather a confluence of factors. And even after we’ve explained these, there is always that touch of mystery. After all, we are dealing with the decisions of millions of people here.

The global growth outlook has certainly deteriorated since US President Donald Trump launched his trade wars. Tariff barriers will lead to downward pressure on the real incomes of American businesses and consumers and weight on the export earnings of other countries.

The OECD, a large think tank representing a club of advanced economies, released its updated global forecast last week. It showed that the global economy will only grow by 2.9% this year, down from the 3.1% it expected previously, and falling from 2024’s growth rate of 3.3%. That seems like a small difference, but on a $110 trillion global economy it amounts to hundreds of billions of lost potential income and output. The OECD expects growth of 2.9% in 2026. So overall, not a pretty picture. But the details matter.

The US faces the biggest expected downshift in expected growth of all the large economies, from a healthy 2.8% in 2024 to only 1.6% this year and 1.5% in 2026. For some other countries, however, the trajectory is upwards. Germany’s growth rate is projected to rise from -0.2% in 2024 to 0.4% this year and 1.2% in 2026. Not big numbers in absolute terms, but an improvement. Japan’s growth rate is expected to rise from 0.2% last year to 0.7% this year. The UK is also expected to show a somewhat better growth rate this year compared to last year.

In other words, equity markets are looking ahead, not backwards. The OECD expects South African growth to rise to 1.3% this year from 0.6% last year.

Policy support
Another factor is that central banks are cutting interest rates outside the US and Japan. Lower interest rates do not only cushion the economy, especially in Europe and other countries where variable rate loans predominate but also make equities more attractive. Other forms of policy support also matter, notably Germany’s rearmament programme and China’s fiscal support.

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