The World Federation of Exchanges, the global industry association for exchanges and CCPs (The WFE), has published new research which analyses the link between stock market development and economic growth on a global scale.
The research analysed quarterly data from 36 countries over two decades (2003-2022).
Key findings
Short term analysis:
- There is a two-way influence between economic output growth and the stock market capitalisation in the short term, but only for high-income countries.
- Low and middle-income countries experience a unidirectional relationship in the short term, where stock market capitalisation positively impacts economic growth, but not vice versa.
This means that low and middle-income country exchanges aren’t seeing a positive impact on their market capitalisation as a result of economic growth, though higher market capitalisation leads to higher economic growth. This reflects structural differences, such as lower savings rates and limited investment capacity, which inhibits the feedback loop from economic growth to stock market development.
- The low- and middle-income group experience a stronger response in output growth to changes in market capitalisation activity compared to high-income countries.
- A doubling of market capitalisation leads to an increase of over 0.4% in economic growth within two quarters for low- and middle-income countries.
This suggests there should be policy interventions aimed at stimulating market capitalisation as they will have a pronounced short-term impact on economic growth in low- and middle-income countries.
Long term analysis:
- Stock market capitalization generally promotes economic growth across all income groups, though the effect is much stronger in high-income countries than in low- and middle-income economies.
- In high-income countries, a 10% increase in stock market capitalization is associated with a 0.045% rise in long-term economic growth.
- The relationship in low- and middle-income countries is weaker, reflecting challenges such as underdeveloped financial systems and structural inefficiencies. However, growth in stock market capitalisation in low- and middle-income countries contributes a greater percentage to overall economic growth.
This shows that well-developed stock markets benefit high-income countries by enabling efficient savings and capital allocation, which fosters sustained economic growth.
Nandini Sukumar, CEO of the World Federation of Exchanges, said, “A growing stock exchange means a growing economy. The research shows that where high-income countries’ stock markets are struggling, regulators must take action to support them, so that they can ensure the continued contribution of this source of economic growth. On the other hand, low-and middle-income countries should focus on strengthening their stock markets to harness these growth benefits and support sustainable economic development. Policymakers must take heed of these findings and better tailor financial regulations and economic strategies to maximise the benefits stock markets bring.”
Commenting on the research findings Dr Pedro Gurrola-Perez, Head of Research at the WFE, said, “Weaker feedback loops from economic growth to stock market development are due to factors such as lower savings rates, limiting the capital available for investment in stock markets. Limited investment capacity reduces businesses' ability and appetite to expand. In these environments, the lack of investor participation and limited business growth may inhibit the ability of economic growth to foster stock market development, and in turn, economic output. Policymakers, particularly in low- and middle-income countries, should therefore focus on strengthening their stock markets to harness these growth benefits and support sustainable economic development.”
Read the full paper here.
