MARKET PLUNGES MATTER AFTER ALL

Up one day, down the next: what economic sense can we make of stock market gyrations?

But those wild market gyrations might matter after all. A sharp correction in global equity prices would pose a significant threat to the global economy, according to Oxford Economics.

Scenarios using the Oxford Global Economic Model (GEM) suggest a 15% decline in world equity prices could cut the level of world GDP by between 0.4 and 0.7 per cent after two years, with a 30 per cent shock knocking off 1.1-1.5 per cent.

The impact varies across countries depending on the scale and structure of financial asset holdings, but in general advanced economies are hit harder than emerging markets.

Declining equity prices can produce negative wealth effects. Estimates suggest a 10 per cent equity price fall cuts consumer spending by around 0.4 per cent in G7 countries. A global equity price shock will also generate significant second-round effects on world GDP as countries hit by the shock transmit this weakness to others through trade links.

Yesterday the FTSE100 Index started higher but finished the day 27.06 lower at 6417.02. Down, but not exactly wrist-slashing.

That should cheer us all up, shouldn’t it?

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