It is often and widely discussed. But what is it, what does it consist of, and how is it linked to the financial world?
The Real Economy is what surrounds us. What we buy, produce and sell. A reality to which words like “crisis” and “recovery” are linked. Here are ten points to understand how it works.
Real Economy: A Definition
Table of Contents
The real economy is the economic sphere, public and private, characterized by the production and distribution of goods and services.
What is the Real Economy Made of?
The list of activities is vast and diverse: it includes, among other things, industrial production, real estate, trade, exchange of goods, development and sale of services.
Difference between Real and Financial Economy
The expression “real economy” is distinguished from the so-called “financial economy“, which is characterized by the absence of production of goods and services . It is therefore made up of shares , bonds , derivatives , funds and other financial instruments , more or less complex, more or less correlated with the real economy.
Main Street vs. Wall Street
In the American glossary, there is the expression “Main Street”. It literally means “main road”, but it identifies the real economy. It was coined in opposition to Wall Street, the street in New York that hosts the American stock exchange and which, by extension, identifies the world of finance. Main Street therefore marks – in a critical sense – the difference between the real and financial economy, as if the two, born to be complementary, were now opposed.
Relationship between Real Economy and Bonds
The real economy and the financial economy do not always proceed in concordance. But the links that hold the two worlds together are clear. In the case of bonds, for example, price and yield are defined – in addition to supply and demand – by the fundamentals of the issuer (whether a company or a State): these are variables, such as GDP, rooted in the real economy.
Relationship between Real Economy and Stocks
The same goes for stocks. If the exchange of securities on the stock exchange is an essential component of the financial economy, it should be remembered that the price – defined by supply and demand – is linked to economic variables, such as the health of a company, its prospects and those of the sector in which it operates.
Investing in Real Economy
The distinction between Main Street and Wall Street is therefore more nuanced than it appears. In addition to the relationship between stocks, bonds and the economy, there are investments directly aimed at supporting the real economy . That is, financial instruments that direct resources towards capital firms (usually from their own country) that operate in non-financial sectors.
The concept of Recession
If the term “ crisis ” is generic, we speak of a technical recession when GDP falls for two consecutive quarters at a cyclical level (i.e. in comparison to the previous quarter).
It is therefore measured with a variable that mainly refers to the real economy, although it is not at all separate from the financial one. The slowdown can in fact be triggered by ” endogenous ” factors (i.e. internal to the economic system) or ” exogenous ” factors (external, such as the geo-political scenario or a pandemic).
Growth and rebound of the real economy
Growth is marked by the progress of the Gross Domestic Product . Although the term is more used (and the possibility of it occurring more frequently) in the financial field, even in the real economy one can speak of a “rebound”.
It occurs when there is vigorous growth followed by a sharp decline. We saw it with the pandemic. An exogenous factor (Covid-19) caused the collapse of the real economy. Once restrictions were eased, activities (which had not slowed down due to their own weakness) resumed more abruptly than what happens in a traditional economic cycle.
Cyclical and countercyclical
Real economy activities can have a strong and direct or inverse and weak relationship with the economic cycle. In fact, there are sectors – called “ cyclical ” – that, to be healthy, need a growing economic environment. This is the case, for example, in construction or automotive .
Other sectors are less dependent on the economic cycle (and in some cases grow precisely in times of crisis): these are the so-called counter-cyclical activities , such as food and pharmaceuticals .
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