The World Federation of Exchanges (WFE), the global industry association for exchanges and central counterparties (CCPs), has unveiled new research that highlights the critical role stock market development plays in driving economic growth worldwide.
The study, spanning data from 36 countries over two decades, highlights significant disparities in how stock markets influence economies across income levels.
The analysis revealed a two-way relationship between stock market capitalization and economic output growth in high-income countries. In contrast, low- and middle-income nations experience a one-directional influence, where increases in stock market capitalization boost economic growth, but economic growth does not significantly enhance market capitalization.
This disparity stems from structural differences such as lower savings rates and limited investment capacity in less affluent countries, which hinder the feedback loop between economic growth and stock market expansion.
Notably, a doubling of market capitalization in these economies is associated with a 0.4 per cent rise in economic growth within two quarters, demonstrating a pronounced responsiveness to market activities.
Over the long term, stock market capitalization positively impacts economic growth across all income groups. However, the effect is more pronounced in high-income countries.
A 10 per cent increase in stock market capitalization correlates with a 0.045 per cent rise in long-term economic growth for these nations.
Meanwhile, low- and middle-income countries face challenges such as underdeveloped financial systems and structural inefficiencies, which dilute the impact of stock market growth.
Despite these obstacles, improvements in market capitalization contribute a greater percentage to overall economic growth in these economies compared to their wealthier counterparts.
The findings indicate an urgent need for tailored policy interventions to maximize the benefits of stock market development. For high-income countries, regulators are urged to support struggling stock markets to sustain their contribution to economic growth.
In low- and middle-income nations, efforts should focus on strengthening financial systems and fostering investment participation to harness the full potential of stock markets.
CEO of the WFE, Nandini Sukumar, emphasized the transformative power of stock exchanges. “A growing stock exchange means a growing economy. Policymakers must take heed of these findings and better tailor financial regulations and economic strategies to maximize the benefits stock markets bring,” he said.
WFE’s Head of Research, Dr. Pedro Gurrola-Perez noted the challenges facing developing economies: “Lower savings rates and limited investment capacity constrain the ability of economic growth to foster stock market development. Policymakers in low- and middle-income countries should prioritize strengthening their stock markets to support sustainable economic development.”
The research highlights the vital role of stock exchanges in fostering economic growth and calls for strategic interventions to address structural inefficiencies.
As global economies strive for resilience and growth, the insights provided by the WFE offer a roadmap for leveraging stock markets as engines of economic development.