Recession and depression are periods of economic downturns when people worry about losing their jobs or their ability to pay their bills.
Some people get upset about how their investment strike during these times.
In other words, these periods are when people aren’t happy or even satisfied with their living standards.
Yet, most people don’t understand the difference between recession versus depression.
This discussion will broaden your knowledge of what recession and depression are and point out their difference.
You can only cope with or defeat something when you understand it well.
So, carefully follow through with this discussion and acquire the information that will be shared.
What Is Recession? – Recession versus Depression
Recession is an economic term that refers to a period of decline in a nation’s (GDP) Gross Domestic Product.
It is when the people of a given country make less demand for services and goods.
When this happens, the economy slows down for several months, often two consecutive quarters.
Before a recession is declared, GDP contracts for a few months before it becomes negative and then turns into a full-blown recession.
In every country, there is often a group of people who are tasked with declaring a recession.
For example, the US has the (NBER) The National Bureau of Economic Research that determines and declares the recessions starting and ending dates.
However, observant people can tell when a recession is about to happen or is happening without external assistance.
Four economic indicators, such as employment rate, retail sales, manufacturing, and income, contribute to the decline of GDP in different ways.
Characteristics of a Recession – Recession versus Depression
To better understand when a recession is about to occur or is occurring, here are some economic development that characterises recessions;
High Unemployment
The rate of unemployment increases before and during a recession due to the declining demand of the market.
Companies and employers lay off their staff to mitigate their losses.
The people who get laid off may find it challenging to get another job.
Low Home Sales – Recession versus Depression
People are less interested in purchasing goods during recessions as money will be a bother.
This means that people are cautious about purchasing above the little money they have during this period.
As a result, there will be a decrease in sales of home products.
Decreasing or Stagnant Wages
Some companies might not lay off their employees.
However, they will want to cut the costs of running their organisation by decreasing their employees’ wages.
And in some cases, some employers might not even pay their employees during the recession.
Causes of Recession – Recession versus Depression
Consumers’ loss of confidence in companies and businesses triggers a recession.
People stop making purchases, and eventually, supply is outweighed by demand.
Consequently, layoffs will become rampant and, in severe cases, bankruptcies.
Several factors cause a recession.
However, the major causes include the following:
Inflation – Recession versus Depression
When supply outweighs demand, services and goods prices will drastically rise.
This causes banks to wake their interest rates.
As a result, people struggle to take loans and even make large purchases as they won’t be able to afford them.
Eventually, this causes banks to experience a significant decline in their business.
The changing economy becomes negative, leading to a possible recession.
High-Interest Rates – Recession versus Depression
Finance is what runs the world economy.
This means that when there is an increase in interest rate, bonds, stock, and asset liquidity will decrease.
In other words, the economy will move slowly, automatically leading to a recession.
Unexpected or Staggering Events
Unexpected or staggering events can lead to recession.
For example, the COVID-19 pandemic lockdown period was unexpected and staggering to the world economy.
During and after the event, people struggled to get by, and there wasn’t much that could be done until the economy stabilised to a point.
Asset Bubble Burst – Recession versus Depression
An asset bubble is when assets like gold, stock, housing, etc., experience a drastic price rise over a short period.
This rise is not based on the product’s value but the irrational exuberance of several people purchasing a specific asset without any sensible reason.
Whenever this happens, investors will not make profits anymore.
In response, the prices of stocks fall, and recession sets in.
Types of Economic Recession – Recession versus Depression
Not all recessions are the same, as they influence the economy and society differently.
The following are the two major types of economic recession:
Boom and Bust Recession
An economic boom is when the commercial activity in an economy increases.
This is a period where individual companies experience significant and rapid growth and sales.
In this case, a country experiences significant growth in GDP.
However, if the economy experiences a negative change, referred to as a bust, there will be dire consequences, such as low consumer confidence.
This often causes a decline in demand.
So, a boom and bust recession happen due to a rise and then a fall in economic activities.
An example of a boom and bust recession is the 1973 recession caused by the shock of oil prices.
You can identify a boom and bust recession with the following features:
- Short-termed
- High-interest rates
- Inflation
The best way to avoid a boom and bust recession is by keeping inflation low and economic growth in line with lasting trend rates.
Balance Sheet Recession
Any recession occurs due to a considerable decline in firms’ and bankfirms’ance banks’ because of bad loans and decreasing asset prices.
As a result of the significant losses firms and banks experience, they restrict lending in their organisation.
Consequently, this leads to a decrease in economic growth, investment, and spending.
An excellent example of a balance sheet recession is America’sAmerica’s2009 recession.
In 2008, firms and banks experienced losses that led to a shortage of cash.
Although the interest rates were cut down to zero, investment and consumer confidence crumbled, giving way to the recession.
Some of the features of this type of recession include:
- Tendency to last long
- Slow recovery
- Tendency to experience a recession double-dip.
The best way to prevent this recession is to avoid asset and credit bubbles.
Example of Recession: The Great Recession – Recession versus Depression
In 2007, an economic recession hit the United States of America and lasted from December 2007 to June 2009.
This recession was termed “the great recession”.
It started when the housing market in the USA lost its mortgage property value due to a boom and bust.
This sprang from the failure of the government to control the financial sector responsible for mortgage lending.
Other causal factors included consumers, lawmakers, and corporations’ borrowing habits in the crumbling financial system.
During this period, the GDP dropped by 4.3%, and the unemployment rate rose by 10.6 %
The recession went on for two years.
On October 3, 2008, the first action toward recovery occurred when Congress created the Trouble Asset Relief Program.
It allowed the Treasury of the United States of America to help troubled banks out of their financial issues by lending them $115 billion.
This first action brought about other events that helped stabilise the country’s economy in later years.
What Is Depression? – Recession versus Depression
Depression is understood to be a prolonged and severe downturn in economic activity.
It is a severe case of a recession that lasts several years.
Depression often causes a 10% decline in GDP each year of depression.
The effect of depression on a country’s economy can last up to a decade or more.
Depressions are rare than the recession and cause more damage.
They are often accompanied by low inflation and high unemployment.
Causes of Economic Depressions – Recession versus Depression
Economic depression is a result of low consumer confidence.
This leads to a decrease in demand that ultimately causes companies to crash.
Companies struggle to survive; as a result, they cut down on their budget.
Apart from this primarily casual factor of economic depression, other things bring about depression.
These include:
Deflation
This is the reduction of prices of goods and services over time.
It seems to be great for consumers as they can afford more commodities.
However, this isn’t good in most cases, as deflation often results from a decline in demand.
In this case, deflation is not healthy.
As prices reduce, the economy lacks balance as its products and services are no longer valuable.
Only smart companies can develop a competitive edge and overcome deflation.
Hikes in Oil Price – Recession versus Depression
Oil prices have a significant effect on an economy.
When it hikes, the ripple effect on a country’s economy is always negative.
In other words, when there is a hike in oil prices, the consumers ultimately lose their purchasing power.
Consequently, this leads to a decrease in demand
Stock Market Crash
Investors from public companies own stocks that make up the stock market.
This stock market sometimes experiences a crash when the stock prices reduce.
There are different reasons for this, but the major one is when investors’ confidence in an economy declines.
When this happens, investments in public companies reduce and go out of business.
Decreased Manufacturing Orders – Recession versus Depression
Businesses flourish based on consumers’ demand for services and products.
Therefore, when there is a decrease in demand, this will cause businesses to decrease their manufacturing orders.
When this happens for a long time, it can bring about a recession or, even worst, a depression.
No Consumer Confidence
Said to be the significant factor for an economic depression, low or no consumer confidence harms the economy.
When people lack confidence in an economy, they spend less on purchasing goods and services.
Consequently, making supply more than demand.
This negatively affects the country’s economy.
Indicationcountry’sming Depressions – Recession versus Depression
Just as with recessions, investments and consumer confidence decrease drastically.
This causes the economy to slow and shut down.
Some things can serve as indicators of when depression is about to happen.
If you take notice of the following, you can prepare for an economic uncertainty like depression.
Increasing Rate of Unemployment
When you notice that the unemployment rate keeps increasing, you can tell that an economic depression is probably on its way.
This is because, with the increasing unemployment, several people will be unable to purchase goods and services.
As a result, demand will reduce and keep reducing.
If things are not resolved, then depression might occur.
A Decline in Property Sales – Recession versus Depression
In a stable economy, the purchasing power of consumers is typically high.
This includes the buying of homes.
However, with an imminent economic depression, sales of properties will become low.
This signals the falling confidence of consumers in an economy.
Rising Inflation
Another great indication is rising inflation.
It can indicate high demand due to sturdy workforces or wage growth.
However, when inflation is too much, it will discourage consumers from spending.
Consequently, this will cause the demand for services and goods to reduce.
Increased Debt Defaults of Credit Cards – Recession versus Depression
High usage of credit cards indicates that consumers are spending.
This works well for the Gross Domestic Product (GDP).
On the other hand, when there is a rise in debt default, it indicates that people are struggling to pay.
Therefore, this serves as another indication of an imminent economic depression.
Example of an Economic Depression: The Great Depression – Recession versus Depression
If you have never experienced an economic depression, you might not fully understand the negative impact on human living.
However, an example of this economic situation will help you grasp the concept better.
A good example of an economic depression is the great depression.
It was a worldwide economic depression that lasted almost a decade; it started in 1929 and ended in 1939.
The depression started in the United States around September 4, 1929, after a serious fall in stock prices.
It became known to the world the day the stock market crashed, on October 29, 1929.
Different countries worldwide felt the impact of this economic disaster to varying degrees.
Nonetheless, worldwide, it was the most profound and longest depression to date.
Apart from the stock market crash, other cases of the great depression were; world trade collapse; bank panics and failures; money supply collapse; and government policies.
The GDP fell to half during the depression as the unemployment rate reached 25%.
People who were able to keep their jobs had their wages cut, and others worked low-paying jobs that they were overqualified for.
The pain of the worldwide depression leads to World War 2.
Some people argue that the World War brought about the end of the depression.
Others claimed that the New Deal programs that US President Roosevelt created in 1933 ended the depression.
Regardless of this, the economy of the United States and other countries only became stable in later years.
Difference between an Economic Recession and Depression – Recession versus Depression
Recession and depression bring about economic instability and woes.
So, are these concepts the same?
The answer to that question is no.
Depression has similar causal factors and effects on an economy with recession.
However, they differ in severity, scale, and duration.
The great depression of the 1930s and the 2007 great recession will be used to point out these differences:
Severity – Recession versus Depression
A recession is a severe time of economic downturn.
However, it is never as serious as a period of depression.
For example, during the great depression, the GDP dropped by 30%, while unemployment rose to 24%.
Meanwhile, the GDP fell by only 4.3% during the great recession, and the unemployment rate was 10.6%.
As you can see, the severity was more during the great depression than it was during the great recession.
This is one significant difference between the two concepts.
Scale
The scale at which depression and recession hit society differs.
Depression has more effect on society than recession.
This difference can be seen in the great depression of the 1930s and the United States great recession.
The great depression started in the United States but spread worldwide.
However, in the case of the great depression, it was confined to the United States.
In other words, recessions are more confined to the individual country compared to depression which has a high tendency to spread worldwide.
Duration – Recession versus Depression
Another significant difference between recession and depression is the duration.
Depression lasts longer than a recession.
For example, the great recession of 2007 went on for two years.
Meanwhile, the great depression lasted up to a decade.
This shows the vast difference between depression and recession.
How To Survive a Recession or Depression – Recession versus Depression
During the COVID-19 lockdown period, the world economy was attacked.
Some countries are still struggling to stabilise their economy, while some are working to sustain their economy.
In the United States of America, it has been projected that the probability of the state falling into an economic recession is 23.0%.
Hence, it is normal to be concerned about if a recession or depression will occur in your country.
As a business person, your fear will increase as your business is also on the line.
However, recession and depression have never ended the world, as the economy can rise again.
How do you intend to cope during and after an economic downturn?
Some things that you can do to ensure your survival include the following:
- Get an Emergency Fund
- Live with a budget
- Get a means to generate additional income
- Invest long-term
- Diversify your investment
- Ensure that you have a high credit score
Conclusion on Recession versus Depression
Periods of economic downturns are terrible times.
People struggle to get by during those times, and the government struggle to find solutions to the crises.
Understanding these concepts and their difference will go a long way in helping you to cope if they should occur.
The difference between recession and depression and other valuable information has been shared here.
So, ensure that you utilise it.
