Readers Question: What is the difference between Consumer led recovery and investment led recovery
In this instance recovery refers to the economy coming out of recession. It means the economy starts to have positive economic growth. Economic growth can be caused by various factors see causes of economic growth.
Consumer led growth means that consumer spending is the main cause of rising aggregate demand and economic growth.
Consumer spending accounts for 66% of AD. Rising consumer spending may lead to an increase in imports and possible current account deficit. In the long term there is more chance that consumer led recovery will cause inflation. However, if the economy is recovering from recession there is likely to be spare capacity in the economy.
Investment led recovery means that firms are investing in new capital. They will employ more workers and reduce unemployment. Investment led growth will increase Aggregate Demand and increase productive capacity. It means that Aggregate Supply will rise. This leads to long term improvements in the economy. Living standards may not rise immediately because consumer spending doesn’t rise that much. However, in the long term the economy may be stronger than if it had been consumer led.