Consumption-led expansions lead to lower future output growth

Abstract

When assessing future growth prospects, does the current structure of demand matter, i.e. does it affect the future growth? This question is analysed in our paper using global and EU panel data. The result is quite striking: consumption-led growth – either in terms of private or public or total consumption – is slower than investment-led or exports-led growth. The same qualitative result is obtained irrespectively of the length of the past growth period (lag window), yet the more often the past is characterised by consumption-led growth, the slower the growth rate is in the future. In this context, our research provides important insights for both structural and cyclical policies.