Can we weather the economic winter? | Inquirer Business
Money Matters

Can we weather the economic winter?

/ 02:01 AM May 24, 2023

As we navigate the uncertainties in the stock market, it is important for us to understand the underlying patterns and cycles that influence our ever-changing economic landscape.

In order to make sense of the market’s ups and downs, it helps to recognize that it operates in cycles. These cycles are like recurring patterns that shape the behavior of investors and the overall course of the economy.


By understanding these patterns, we can learn insights into the potential direction of the market and make more informed investment decisions.

In our previous discussion in this column, we have explored the theory of Kondratieff Wave, which suggests that economies undergo long-term waves consisting of four distinct phases, similar to the changing seasons: spring, summer, autumn and winter.


According to this theory, during spring and summer seasons, the economy experiences phases of expansion and prosperity. But, just as the seasons transition from summer to autumn, the economy also goes through changes.

During autumn, interest rates and inflation begin to decline. People tend to spend more, while businesses expand, as borrowing money becomes easier and more affordable.

However, the downside of this surge in wealth and prosperity is that as people indulge in more and more consumption, the economy begins to accumulate debt at a rapid pace.

So, while autumn may bring about a sense of affluence and happiness, it also marks the beginning of a period when the economy faces challenges as it enters the winter phase.

If we analyze the historical trends of inflation and interest rates, it becomes evident that the autumn phase of our economy likely concluded in 2019, right before the pandemic occurred.

During this phase, we saw how falling interest rates and inflation played a significant role in fostering the growth of the economy. The annual inflation rate steadily decreased from a peak of 9.6 percent in 2008 to 2.4 percent in 2019. Similarly, the 10-year bond yield also experienced a decline, dropping from 9.66 percent in 2008 to 2.8 percent in 2020.

But the bottoming out of inflation and interest rates brought an end to the multi-year bull market in the Philippine Stock Exchange, signaling the onset of the winter phase.


The winter phase is a period of economic downturn, contraction and even depression that could last for years. During this period, financial markets can become volatile and unstable. Stock markets may experience sharp declines, and investors may become cautious or risk-averse, causing overall market sentiment to be negative.

Moreover, rising economic uncertainties may cause consumers to reduce their spending, leading to weakening demand for goods and services, which further exacerbates the economic downturn.

In some instances, the winter phase of the economic cycle can be marked by economic stagnation, with minimal or no growth. This can lead to deflation, a situation in which the prices of goods and services decline, resulting in reduced profits and additional debts.

Kondratieff saw these depressions as necessary cleansing periods because they allow the economy to recalibrate itself after the previous period of excesses and lay the foundation for future growth.

If we examine the level of indebtedness in the economy, we can observe that the total loan exposure of banks, as a percentage of gross domestic product (GDP), has nearly doubled since the financial crisis, rising from 25.3 percent in 2008 to 49.7 percent at present, highlighting the significant levels of debt accumulated.

Furthermore, loans associated with real estate have also tripled, increasing from 3.7 percent in 2008 to 10.1 percent, indicating substantial expansion in borrowings for property investments.

The description of the winter phase in the Kondratieff Waves theory bears a striking resemblance to the current situation we are witnessing.

According to Kondratieff, the abundance of loans extended in the past will lead to a scarcity of available funds during this phase. Consequently, companies will encounter difficulties in obtaining borrowing opportunities.

Initially, central banks will attempt to stimulate economic activity by keeping interest rates stable, but, as the credit crunch intensifies, interest rates are expected to rise.

Recent rise in inflation and interest rates could exacerbate the challenges faced by companies seeking to borrow funds or refinance their existing loans, which could hamper their financial stability.

A slowdown in the economy coupled with rising financial risks could result in a significant selloff in the stock market, as companies seek to deleverage by selling their assets to raise cash.

We need to remember that as the economy goes through this cleansing process and builds a stronger foundation, it also sets the stage for the next phase of growth in the long-term.

The winter phase is not a permanent state. Just like the seasons, economic cycles come and go. While it can be a trying time for investors, it also presents opportunities for those who can navigate it wisely. INQ

Henry Ong is a registered financial planner of RFP Philippines. Stock data and tools were provided by First Metro Securities. To learn more about investment planning, attend the 101st batch of RFP program this May 2023. To register, email or text 0917-6248110.

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