The Death of Demand

Mike Waterson and Raymond Cheung

Governments throughout the developed world are examining ways to cut the giant public-sector budget deficits that have opened up following the financial crisis. It is widely hoped that a combination of budget cuts and re-emerging economic growth will reduce the problem to manageable dimensions.

This paper suggests that policies dependent on a re-emergence of economic growth to manage deficit situations may in many cases be over-optimistic, as economic growth is likely to be very low in many OECD countries over the next decade. Government forecasts are frequently optimistic, but in the current situation realism is more than usually important.

The average rate of real economic growth has been following a largely unrecognised falling trend for many years. Every successive decade since the 1950s has seen a lower rate of real growth than the preceding one. There are few reasons to believe this trend will reverse, but many reasons to believe it may worsen. We believe therefore that corporate and government plans should realistically expect economic growth in the developed countries as a whole of perhaps one third of the 2–3% range commonly found in government projections.