This is not the housing market, but…Do you know what happens if the stock market decreases? (e.g. due to prive equity buyouts). Does it affect the economy overall? Thanks for your help!
With share prices falling significantly since the start of the year, it is an interesting question to consider what is the economic impact of this.
- Lower Share prices mean investors will see a fall in wealth. However, this is unlikely to influence consumption significantly. Most people who buy shares are relatively affluent; if their stocks decrease in value it doesn’t mean their consumption will suffer. Usually, people who buy shares see it as speculative investment.
- Nevertheless, if the fall in shares is prolonged it will have a small effect in reducing consumer spending.
- In the long term, lower share prices will harm investment trusts and pension funds. This could leave people with lower pension payouts. However, this is very much a long term factor.
- More difficult to raise finance for investment. Some firms use the stock market as a way to raise finance for investment. If share prices fall, it will be more difficult to raise equity through share issues and so it could reduce investment. However, this is only a relatively small influence on investment levels.
- Confidence Factor. Falling shares may weaken consumer and business confidence; it reinforces the economic turmoil and may make them reluctant to spend and invest.
Conclusion
- Falling share prices are primarily a reflection of a weakening economy in the US and UK. It is not the share prices that are causing the economy to go down.
- If banks like Bear Sterns went bankrupt that would have a big economic impact.
- Sometimes falling share prices can occur even during high growth. The stock market crash of 1987 was followed by an economic boom in the UK
- My prediction is that share prices may recover in the later part of 2008, but the US will still go into recession. The recession is already built into share prices.
Related
The post Effect of Falling Share Prices on the Economy appeared first on Economics Help.
