I believe you may be thinking of The Speed of the Dark by Alex Shearer.
A summary from Amazon reads:
Ernst Eckmann is an artist. He specialises in the art of the impossible, making objects so tiny, so perfect, that it's hard to believe they are real. A miniature camel passes through the eye of a real needle; a pyramid is carved into a grain of sugar; a polar bear sits on an iceberg of salt. Eckmann works in silence, carving between heartbeats.
Christopher Mallan loves Eckmann's sculptures. He visits the gallery often on his way home from school to marvel at the creations beneath their glass domes. Until one day, the impossible happens - and Christopher sees a sculpture so real that it moves, dances, even seems to breathe...
Having read this book myself, I'll try to link other story details you mentioned:
The main character was a lonely middle-aged man who created microscopic exhibits and displayed them in his own little curio museum.
Eckmann is a sculptor who suffers from dwarfism (part of the reason he makes the small displays). He has his exhibits set up with microscopes pointed at exactly the right angle to see the tiny display.
A theme of the book is the phrase "working between the heartbeats" as Eckman can only carve between heartbeats since the work is so precise, a heartbeat would throw off his accuracy.
The man fancied a girl who would often walk past his museum but she didn't notice/have any interest in him and also had a boyfriend.
A street performer Poppea often dances outside his museum. She has a box which plays music when someone puts a coin in and then she dances. At one point Eckmann tries to give her a large contribution, but the paper note doesn't have enough weight to trigger the music. He is embarrassed, but she dances for him even without the music.
He lures her in then shrinks her down and keeps her in a house he's made.
Eckmann shrinks Poppea down, and at first has her as a dancer on the tip of a needle. However, when her boyfriend is subsequently shrunk down too, he moves them into a snow globe where they live out the rest of their days.
Time passes and I'm pretty sure they have a baby, while the man has to look after them, shrinking down all the things they need like clothes and such and removing their rubbish.
The couple do indeed have a baby. Eckmann shrinks them groceries etc. as he has no way to unshrink them and feels guilty. At one point Poppea and her boyfriend daub words on the walls of the buildings in the snow globe "SICK LITTLE DWARF". Eckmann is furious and stops sending them food until they remove the graffiti.
That's how the story ends.
The story is actually a diary told mostly from the perspective of a boy named Christopher who admires Eckmann's exhibits. I think either his mother is Poppea, or his father is her boyfriend (or both).
The diary is being read by Christopher's colleague who has found it now that Christopher had gone missing. It turns out that after Eckmann died, Christopher continued to dedicate his life to reversing the shrink ray, but having no such luck, he decides to shrink himself and spend time in the snow globe with his parents and sister as they are all getting older. He leaves the note for his colleague to continue his research into reversing the procedure.
