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UBS chief economist: 'Equities are not actually very important for the global economy'

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
Don’t worry: Paul Donovan, Global Economist at UBS wealth management. Photo: Matthew Lloyd/Getty Images for ReSource 2012
Don’t worry: Paul Donovan, Global Economist at UBS wealth management. Photo: Matthew Lloyd/Getty Images for ReSource 2012

Forecasts of an imminent global recession are misguided because markets overestimate the importance of equities, according to a top UBS economist.

Paul Donovan, global chief economist at UBS Wealth Management, told journalists on Wednesday that an over-reliance on stock market movements has led to misguided fears about recessions this year. UBS expects global growth to slow in 2019, but to still expand.

“There is a lot of obsession around the whole concept of ‘equities are the economy, what’s good for Ford is good for the United States’ etc.,” Donovan said. “This doesn’t recognise fully the fact that equities are not actually very important for the global economy.”

Stock markets experienced a surge in volatility towards the end of 2018, which led some commentators and analysts to predict a shrinking of the global economy. UBS expects global GDP growth to merely slow slightly, from 3.8% in 2018 to 3.6% in 2019.

“Financial markets will have a more pessimistic idea of what is really going on in the economy than what is actually going on in the economy because the most important parts of the economy could be doing relatively well,” Donovan said.

“Listed companies in most major economies account for about a quarter of economic output. Small and medium-sized businesses — the mom and pop stores — and government are the overwhelming majority of employment, investment, inventory, and economic activity.”

These other aspects of the economy usual move in-line with large, listed businesses, according to Donovan, but recent “dramatic structural changes” have potentially disrupted this. He cited the rise in self-employment and the use of personal technology at work.

For the last few years, the dominant relevant change has been in favour of large businesses. We’ve had rising profit share of GDP in the economy, mainly because businesses have been able to capitalise on a lot of the changes we’ve seen to date,” he said.

We could be on the cusp of seeing some relative underperformance of large companies as the pendulum swings back in favour of labour and we start to see some squeezing of profit margins coming in.”

Italy slipped into recession last month and there are fears that Germany is edging closer to recession after poor data on Thursday. A recession is defined as two quarters where economic activity contracts.


Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.

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