Meaning and understanding of Recession vs Depression
Recession vs Depression Meaning – Food is more expensive today. Petrol prices remain stubbornly high in Australia. Interest rates are on the march.
With these problems not only in the Australian economy, but also in the US and UK, more and more people are worried about the possibility of a global recession – or even a depression.
While both recession vs depression describe periods of economic decline, the terms are not interchangeable. A depression is significantly worse than a recession and much rarer.
Main differences between Recession vs Depression
Definition of Recession
What is Recession or Meaning and Definition of Recession – Although the Reserve Bank of Australia states that there is no single definition of a recession, it recognizes that different descriptions of a recession share common features involving economic output and labor market outcomes. Recession vs Depression
Meanwhile, the official definition in the US comes from the National Bureau of Economic Research (NBER).
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The NBER defines a recession as a period of significant economic decline that affects multiple segments of the economy and lasts for more than a few months.
Recessions are characterized by the following five economic developments:
- High unemployment. In a recession, the unemployment rate rises as companies lay off workers to accommodate falling demand.
- Declining home sales and prices. Recessions typically lead to a decline in home sales and prices as buyers have less money available and are more cautious about making large purchases.
- The stock market is falling. Stock prices are falling as investors lose confidence in the economy as a whole and in companies’ ability to generate profits.
- Stagnant or declining wages. In a recession, wages often stagnate or decline as companies try to cut costs.
- Negative Gross Domestic Product (GDP). A combination of the above factors means that consumers spend less, which reduces the demand for goods and services. As a result, GDP decreases during a recession.
Recessions are a normal part of the economic cycle and most economists accept that Australia has experienced several episodes of weak economic activity that would be defined as recessions.
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However, as the RBA explains, there are also some episodes of weak economic activity where there is disagreement among economists about whether they were recessions, partly because of the different definitions of recession that can be used.
Definition of Depression?
What is Depression or Meaning and Definition of Depression – Although people often worry about economic depressions, they are much rarer than recessions.
Definitions vary, but a depression usually means a severe and prolonged economic downturn that can affect several countries at the same time.
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During a recession, the unemployment rate rises into the double digits and stays there for years, leading to a complete collapse of demand for consumer goods. Recession vs Depression
As a result, companies cut production or close manufacturing plants with lower exports.
The Great Depression is a paradigmatic example. It lasted from 1929 to 1939 and was devastating in its severity and impact worldwide. During the Great Depression, the US faced:
- Skyrocketing unemployment. At its worst point, nearly 25% of the workforce was unemployed. About 12.8 million people were out of work.
- Fall in wages. People who managed to hold down jobs earned significantly less than before the Depression. Wages fell by 42.5% between 1929 and 1933.
- Significant declines in GDP. Real GDP fell by 29% between 1929 and 1933.
- Large-scale bank failures. Approximately 7,000 banks, nearly a third of the banking system, failed between 1930 and 1933.
Australia was less affected than the US – and many other economies – yet still experienced the severe social and economic consequences of the Great Depression, including an unemployment rate that reached 30% in 1933, according to the official Australian Yearbook.
How is a Recession Different from a Depression?
Now, lets talk about Recession vs Depressions or Difference between Recession vs Depressions – May sound similar to recessions, but they tend to be much more severe. Most importantly, they tend to last much longer.
To put this in perspective, consider the differences between the Great Depression and the Great Recession, which lasted from December 2007 to June 2009. The Great Recession was the longest recession since World War II and was remarkably severe compared to other recessions. Recession vs Depression
What is the difference between recession and depression?
Recession and Depression in February 2007
Great question. Unfortunately, there is no standard answer, although there is a well-known joke that economists like to tell about the difference between the two. But, let’s get back to that later.
Recession in February 2007
Let’s start by defining a recession. As I mentioned earlier, there are several commonly used definitions of recession. For example, journalists often describe a recession as two consecutive quarters of declines in quarterly real (adjusted for inflation) gross domestic product (GDP). Recession vs Depression
Definitions used by economists vary. Economists use the monthly peaks and troughs of the business cycle determined by the National Bureau of Economic Research (NBER) to define periods of expansion and contraction. The NBER website lists peaks and troughs in economic activity beginning with the decline in December 1854. The website also defines a recession as:
A recession is a significant decline in economic activity spread across the economy lasting more than a few months, usually visible in real GDP, real income, employment, industrial production, and wholesale retail sales. A recession begins just after the economy reaches a peak in activity and ends when the economy hits a trough. Between trough and peak, the economy is expanding. Expansion is the normal state of the economy; most recessions are short and have been rare in recent decades. Recession vs Depression
Depression in February 2007
While there is also no standard definition of depression, it is commonly defined as a more severe version of a recession. In his popular intermediate macroeconomics textbook, Gregory Mankiw (Mankiw 2003) distinguishes between the two:
There are repeated periods during which real GDP falls, the most dramatic example being the early 1930s. Such periods are called recessions if they are mild and depressions if they are more severe.
As Mankiw has pointed out, perhaps the most famous economic downturn in US (as well as world) economic history was the Great Depression, often described as beginning in 1929 and lasting through at least the 1930s and early 1940s. a period that actually includes two severe economic downturns. Recession vs Depression
Using NBER business cycle data, the first downturn of the Great Depression began in August 1929 and lasted 43 months, until March 1933, far longer than any other contraction in the twentieth century. The economy then expanded for 21 months, from March 1933 to May 1937, before suffering another contraction: from May 1937 to June 1938, a period of 13 months, the economy contracted again.
Degree of Severity of Recession vs Depression
One quick way to illustrate the difference between the severity of economic downturns associated with recessions between 1930 and 2006 is to examine the annual growth rates of real GDP (chained to 2000 dollars). Chart 1 shows the year-on-year growth or decline of the economy. Gray bars represent recessions identified by the NBER. The two most severe declines in output (excluding post-World War II adjustments from 1945 to 1947) occurred during the Great Depression of the 1930s.
The Great Recession had a major impact on the economy. But while it was incredibly damaging, it didn’t come close to the severity of the Great Depression.
In Australia, GDP fell in only one quarter and the unemployment rate rose to 6% compared to 30% during the Great Depression.
The RBA says the Australian economy fared much better than most during the Great Recession thanks to a healthy financial system, relatively large exposure to China’s dynamic economy and strong macroeconomic stimulus that could cushion it from a global downturn.
Could Another Great Depression Be Coming in 2023?
Could another depression be coming soon Recession vs Depression? The short answer is no. Various measures were put in place to prevent further depression.
During the Great Depression, the US Federal Reserve failed to take measures to control the money supply and prices, leading to deflation. Since then, the Federal Reserve has taken a much more active role in managing and preventing the economic crisis in the US.
Here in Australia, the government and policymakers have also taken measures to ensure the economy doesn’t suffer a big downturn: the RBA cut interest rates by 100 basis points; the government announced a $10.4 billion stimulus package for retirees, low-income families and to support housing construction; and the Australian Prudential Regulation Authority (APRA) introduced tighter global banking regulations.
After the GFC crisis, for example, both APRA and the financial market and corporate regulator, the Australian Securities and Investments Commission, also acted to strengthen credit standards and increase the resilience of the financial and private sectors.
Similar systems have been put in place in the US, with fiscal stimulus – aka stimulus controls – enacted to protect individuals at risk of job and income loss, as well as the institution of the Wall Street Reform and Consumer Protection Act – also known as the Dodd-Frank Act – in 2010.
The Dodd-Frank reforms affected the entire US financial system, including banks, investment firms, and insurance companies, with the goal of making the financial system stronger and less likely to fail by improving transparency and accountability.
So while recessions are a normal part of the business cycle, another depression is unlikely to occur thanks to measures put in place by various governments that have allowed the global economy to be better equipped to weather any downturns.
Who Benefits from a Recession?
While the average consumer will not benefit from a recession, some industries and businesses can perform well despite an economic downturn. These include healthcare, food and trucking, as these are inflexible industries that remain essential. Recession vs Depression
Can Recession Lead to Depression?
Yes, depression is born of recession; however, depression is much more severe and long-lasting. Recession vs Depression
An economic downturn would generally be referred to as a depression if there was a period of more than two years of falling GDP and rising unemployment. Recession vs Depression
Which is Worse, Recession or Depression?
While neither recession nor depression would be considered good, depression is considered worse among them because of its long-term and more severe effects. Recession vs Depression
A recession can often only affect a single country’s economy, while a depression and its negative effects are felt on a global scale.