For more than two years, global share prices have been falling sharply. This loss in the value of shares seems to put consumers off spending, and is therefore damaging overall economic growth.

This is at least the case in Germany, for which a recent study carried out by the Mannheim Centre for European Economic Research (ZEW), has indicated that the average turnover of businesses falls by 0.5 per cent for every 10 per cent decrease in the value of shares. This is, however, an overall impact that sets in gradually and which effects will only be seen to its full extent after a period of around two years. Measured in terms of the DAX Index, which has fallen by 55 per cent since the beginning of 2000, real turnover in the retail sector is set to fall by around 2.8 per cent. This decrease will certainly be realised to some extent, as the value of shares continues to decline.

The ZEW study, which focused on the impact of changes in the stock market on economic growth, was carried out on behalf of the Federal Ministry for Economic Affairs and Energy (BMWi). It aimed in particular to determine whether continued falls in the share value of current and future incomes decreases the actual wealth of private households and therefore leads to a fall in levels of private spending.

In anglophone countries, an interdependence of this kind is much more noticeable than it is in Germany. In the USA for example, a decrease in the value of shares by 10 per cent within a period of two years, leads to a fall in spending of around 0.7 per cent. The value of shares in the US stock market (measured in terms of the Standard & Poor 500-Index), has fallen by 48 per cent since the beginning of 2000. The greatest falls in private spending are therefore expected to be seen in the USA, where decreases of around 3.4 per cent are to be expected

Nevertheless, the impact of changes in the stock market on private spending should also not be overestimated. The value of shares held by households in Germany is comparatively small and fairly concentrated. The fall in the value of shares thus primarily affect wealthy households. Such households are not necessarily forced to immediately reduce their spending. Indeed, it is not at all certain, that the significant falls currently witnessed in the stock market will continue. In the case of long run investments in particular, the impacts on private spending are expected to be minimal.

Falls in value in the stock market could, however, have a negative impact on business investments. This is particularly the case for small, innovative businesses, which have not been able to secure capital via the stock market since two years. In general, corporations and capital financing may be put under pressure, as falls in the value of shares has reduced companies' value and forced banks to compensate their own losses in the stock market.  Between 1996 and 2000, however, only around 3.5 per cent of business investments in Germany were directly financed by capital increases or new issues. The loss in the value of shares may therefore reduce the overall rate of economic growth. Signs of an upswing, however, suggest that stagnation will be avoided.


Dr. Michael Schröder, Phone: +49(0)621/1235-140, E-mail:

Dr. Peter Westerheide, E-mail:






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