Understanding Economic Recession

Recession.

Depression.

Slowdown.

Everyone is using these terms to such an extent that they have turned into common parlance. Often, these terms are used interchangeably, though economists will point out differences between them. And they would be right too – all these terms differ in meaning.

Migrant Mother - A Poignant Image of the Great Depression

So, what exactly do these terms mean – recession / depression / slowdown?

Various definitions have been propounded by economists, and as is expected of economists, one set will disagree with the other about any thing on earth! Yet, some basic rules of thumb emerge -

Recession – When there are two successive quarters of economic contraction, or a decrease in real GDP (gross Domestic Product).

Depression – A ‘severe’ recession, where the GDP contraction approaches 10% or more, lasting for more than three years.

Slowdown – The most ‘benign’ of this lot is the slowdown, which is just a deceleration in the GDP growth.

It is very important to understand the difference between ‘GDP contraction’ and ‘GDP deceleration’, as it means the difference between recession and slowdown. A GDP contraction is the ‘malignant’ one of the lot – it means that the GDP growth is negative – and the GDP figures show progressively lesser amounts with every passing quarter. On the other hand, a GDP deceleration means that the growth rate decreases, becomes lesser than what it was earlier, but is still positive. For example, let us consider economies A and B.

Economy A –

GDP Growth Rates –  –>

Jan – Mar 2009                     2 %

Apr – Jun 2009                     1 %

Jul – Sep 2009                  -0.5 %

Oct – Dec 2009                -0.8 %

Economy B –

GDP Growth Rates –  –>

Jan – Mar 2009                   6 %

Apr – Jun 2009                   5 %

Jul – Sep 2009                    4 %

Oct – Dec 2009                  3 %

Economy A has slipped into a recession – its GDP growth has turned negative from the third quarter – and if it continues on this path for three years or more, it will be considered gripped by an economic depression.

Economy B, on the other hand, still retains a positive GDP growth figure – the GDP is growing – just at a slower pace. Economy B is suffering from an economic slowdown.

Global Depression/Slowdown/Recession -

Different countries follow different economic systems, and fare differently. Even during the current period, while some countries (USA/Western European countries, etc) are truly in the grip of recession, some economies, especially emerging economies, have managed to stay afloat, and shown a positive growth, even though they are growing at a slower pace than earlier. For example, countries like China, India, Brazil etc have suffered a drop in GDP growth – but are still growing nevertheless.

As such, there have been very few instances when the overall global economy has suffered a depression. One such example is, of course, the Great Depression of the 1930s. Such instances have, fortunately, not been repeated on the same scale. Many symptoms in the current period were similar to what they were before the Great Depression, but the situation never became as bad.

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