What is the difference between a recession and a depression?
With the ongoing coronavirus crisis devastating businesses around the world, there has been an increased amount of news stories about an impending recession or depression. But, what do those terms mean? And what does the future hold for world markets? Business Leader investigates.
What is a recession?
In economic terms, a recession is a business cycle contraction when there is a sharp decline in economic activity.
A recession occurs when there is a widespread drop in public spending, and is triggered by events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or a global pandemic – as we are experiencing right now with Covid-19.
In recent history, it can be defined more clearly as two successive quarters (or six months) of negative economic growth, severely impacting the GDP of the country, retail sales, employment status and manufacturing production.
Typically, these last for between six months and a year. However, the 2008 financial crisis – known as the Great Recession – lasted 17 months. It was the biggest crisis since the Great Depression of 1929.
In the past 100 years, there have been dozens of recorded recessions (both national and international) – compared to just one depression in the same time period.
What is a depression?
A depression is a sustained, long-term downturn in national or global economic activity. It is also a more severe and prolonged economic downturn than what is seen during a recession.
Depressions are defined by their length and a sharp increase in unemployment. The further result of this decreased output is that there are a fewer customers; suppliers cut back on production; and investment dries up.
There are also an increased number of bankruptcies, as companies struggle to cope with the lowering of supply and demand, as well as rent rates and lack of government support.
These bankruptcies add to the volatility of trade markets and currency values.
The Great Depression of 1929 lasted a whole decade – the biggest recession of the last century.
Could coronavirus trigger a recession or depression?
Recently, the International Monetary Fund (IMF) stated that the negative global growth so far this year could trigger ‘a recession at least as bad as during the 2007-08 global financial crisis – or worse’. This highlights the severity of the situation that COVID-19 has put on the global economy.
The USA last week announced that it currently had a record number of people who are unemployed, and leading countries around the world are on lockdown – meaning more and more people are working from home or have been affected by Furlough Leave.
However, the reason that ‘depression’ has been used in the same breath as ‘coronavirus’ in recent weeks, is that the severity of the situation and the incredible damage that has done to the economy – is eerily similar to time in the lead up to the 1929 crash.