Why do GDP figures affect the stock market and your investment planning?

When you follow economic news, you’ve probably heard the term “GDP” quite often. Some people may only know that it is an important indicator but do not understand in depth why this number causes the SET Index or the stock market to fluctuate. Today, we will analyze in detail what GDP means in the news, how to assess its impact on investments, and why it is a crucial piece of information that investors need to monitor.

GDP and Its Connection to the Country’s Capital Markets

From an investor’s perspective, GDP is directly related to the performance of companies listed on the stock exchange. When GDP rises, it indicates that the economy is expanding, and companies generally have the opportunity to generate more revenue, leading to higher stock prices. Conversely, when GDP contracts, companies often face declining revenues, which can cause stock indices to fall. It is not uncommon for the stock market to move in response to GDP announcements.

What Is GDP Really?

GDP or Gross Domestic Product is essentially the total monetary value of all finished goods and services produced within a country during a specific period. It sums up the overall productive effort of the economy, whether from domestic businesses or foreign companies operating within the country. This figure is usually calculated annually, but sometimes quarterly to provide more current data.

GDP figures are continually revised as new data becomes available. Additionally, adjustments are made to remove the effects of inflation to accurately reflect real economic growth.

Components of a Country’s GDP

When discussing GDP figures, we must consider the four main components, with the formula being GDP = C + G + I + NX.

C (Private Consumption) - Household Spending

This is the money spent by individuals on goods and services, such as food, clothing, or various services. Consumption makes up the largest part of GDP. If people are willing to spend more, it indicates high confidence in the economy, and GDP will increase.

G (Government Spending) - Government Expenditure

The government spends on infrastructure investments, purchasing equipment, and paying civil servant salaries. When the economy is in a downturn and consumer spending drops, the government often increases spending to stimulate economic activity.

I (Investment) - Business and Private Investment

Businesses spend on machinery, expanding offices, or starting new projects. These investments increase the economy’s productive capacity and create jobs. When businesses are confident, they tend to invest more, which raises GDP.

NX (Net Exports) - Net Exports

This is the value of goods and services produced domestically and exported abroad minus imports. If exports exceed imports, this component is positive, contributing to higher GDP.

Different Types of GDP Figures You Should Know

Nominal GDP - GDP figure including inflation

This is calculated using current prices. If the general price level increases, Nominal GDP will also rise, even if there is no real increase in production. That’s why comparing GDP across years requires using Real GDP.

Real GDP - GDP adjusted for inflation

This is calculated using prices from a base year (. This adjustment allows us to see how much actual production has increased or decreased without the distortion of inflation. Economists typically use Real GDP to compare economic growth across different years.

For example, if prices have increased by 5% since the base year, the deflator = 1.05. Dividing Nominal GDP by this deflator yields the Real GDP. Generally, Nominal GDP is higher than Real GDP because of positive inflation.

The Importance of Monitoring GDP for the Economy and Investment

GDP provides an overall picture of the economic condition at a given time. Policymakers use this data to decide on monetary policy adjustments. Rapid GDP growth may lead to inflation, while declining GDP could signal a recession. Although GDP does not tell the entire story of the economy, it remains a key indicator that helps policymakers understand the country’s fundamental issues.

For investors, GDP figures are more than just news numbers. This is because all listed companies in the stock market generate revenue within the country, which is a significant component of GDP. When GDP rises, it indicates that companies are performing well, and stock prices tend to go up. Conversely, when GDP falls, corporate earnings often decline, putting downward pressure on the stock market. This relationship shows that GDP and the stock market often move in the same direction in a meaningful way.

Summary

The GDP figure may seem like just statistical data, but it is a vital indicator for both national economic policy and your investment decisions. While GDP does not capture the entire economy, it provides a clear picture of the overall direction of the economic system and market trends. To analyze economic and market conditions more deeply, consider incorporating other data such as employment rates, import-export levels, and consumer spending information.