Keep calm winter has arrived | Inquirer Business
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Keep calm winter has arrived

/ 04:00 AM March 31, 2021

Last year, we have discussed in this column “Winter is coming … are you ready?” that the long-term economic cycle, similar to the life cycle of nature, follows different phases of growth.

These phases, which alternate in high-growth and low-growth periods, according to the theory of Kondratieff Waves, consist of four seasons: spring, summer, autumn and winter.


The first wave, which is the “spring” growth phase, is a period of strong economic growth primarily driven by technological innovations that last for about 25 years.

The second wave, the “summer” phase, is when the economy has reached its limit and starts to slow down, as resources dry up and production costs increase.


The economy will suffer a mild recession characterized by slower business growth and falling profits during this phase, which could last for three to five years.

The third wave,  the “autumn” phase, is when the economy has recovered from recession and enters a stable period of selective industry growth that lasts for seven to 10 years.

During this period, businesses and consumers will enjoy low inflation and interest rates, which will motivate them to borrow, causing total debts to accumulate rapidly.

The fourth wave,  the “winter” phase, is when the excesses in the economy have finally caught up with its limits, triggering a three-year economic crisis, followed by a 15-year deflationary period.

If we were to follow the trends of our inflation and interest rates in the past, which were historically low, we could say that those periods of economic growth were part of the “autumn” phase.

For example, the historical monthly headline inflation rate has fallen from a high of 9.3 percent in 2008 to only 2.48 percent in 2019. Similarly, the 10-year bond yield also declined from a high of 9.66 percent in 2008 to 4.4 percent in 2019.

And this phase must have officially ended when the Philippine Stock Exchange index (PSEi) peaked in early 2018.


According to Kondratieff Waves theory, the beginning of “winter” phase is usually marked by the end of a bull market. Although it took almost two more years before the PSEi  finally crashed, the market was already on a downtrend.

The “winter” phase is considered a cleansing period for the economy to deleverage from its massive amounts of debts from the past, which may take a long time to work out.

If we check the level of our indebtedness in the economy, the total loans exposure of banks as a percentage of gross domestic product (GDP) has almost doubled since the financial crisis from 25.3 percent in 2008 to 47.9 percent by the end of 2019.

It appears like the deleveraging process has not yet started, as total loans exposure of banks hardly decreased last year. In fact, with the decline in GDP, total loans exposure as percentage of GDP increased to 51 percent by end of 2020.

Real estate related loans, which have almost tripled from 3.7 percent in 2008 to 9.0 percent in 2019, likewise increased to 9.8 percent of GDP last year.

Only credit card and auto loans, which have more than doubled to 4.5 percent in 2019 from 2.1 percent in 2008, showed slight reduction to 4.3 percent of GDP last year, as aggregate demand slowed down during the crisis.

Kondratieff Waves theory’s description of what it is like to be in “winter” phase bears a similarity to what we are seeing today.

According to Kondratieff, because of so much loans extended in the past, a lack of available funds will make it difficult for companies to borrow during this period.

Interest rates will initially fall, but eventually escalate throughout the “winter” phase as the credit crunch develops. And when everyone is looking to sell their assets to pay their debts, asset prices will also fall, causing a major sell-off in the stock market.

While this “winter” may be a season of pain, we also have to remember that “winter” is also the beginning of something new and the end of the cycle.

As the economy cleanses its excesses, it also rebuilds a new base for future growth. This is a period for opportunities to look value, as we transition to the next growth cycle. INQ

Henry Ong is a registered financial planner of RFP Philippines. Stock data and tools provided by First Metro Securities. To learn more about investment planning, attend the 89th batch of RFP program this May 2021. To register, email [email protected] or text 0917-9689774.

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