What is a Recession and a Depression?

blog post featured image highlighting the topic of what is a recession and a depression

Recession and Depression

The Oxford Dictionary defines a recession as “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.” On the other hand, an economic depression is “a long and severe recession in an economy or market.”

What we can glean from these definitions is that depression is a recession on steroids. It is a much graver economic downfall with effects that can last for at least a decade. Let’s dive in to differentiate the two and see if we are in a recession, or if we need to brace ourselves for a much harsher wave of depression.


Recession


What it looks like: During a recession, the economy sees a downward trend GDP, employment, income, and sales.

A recession is an unavoidable dip in the economy, based on the natural business cycle that affects every business or economy.

This cycle has four parts: expansion, peak, contraction, and trough. Economists observe and predict movements in the economy, based on patterns and trends over long periods of time. 


How long it lasts: A recession lasts for months, with the average at 11 months.


Indicators and Effects: A recession is characterised mainly by a decline in production and employment.

The significant repercussion is the weakened spending power of households, which then snowballs into businesses seeing slow movement in their stocks.

As a result, companies delay purchases and halt risky investments, paralysing a whole nation’s economic activity. The overall confidence on the economy, on the government, on stocks, and generally, in the future, are at low levels.

Scope: A recession can be limited to a geographic location, such as a nation, and may not affect the global economy.

Depression


What it looks like: The World has been through a single depression, the Great Depression.

It happened during the 1920s to 1930s, decades that saw adverse climate conditions and a world war. During this time, the unemployment rate went as low as 70%, a figure much higher than recessions’ record rate of 10%.


How long it lasts: History tells us that an economic depression lasts for at least a decade. Recovery started at the end of World War II when public trust began to stabilise again gradually.


Indicators and Effects: Like mentioned above, depression is like a recession, but on a more significant, more challenging-to-manage scale.

It affected the morale of a population, causing people to move in fear rather than in confidence.

Naturally, because of the high unemployment rate, families were forced to live in scarcity. It cascaded to health, education, and productivity.


Scope: The Great Depression affected the whole world and made it difficult for the global economy to pick up naturally. Governments had to intervene.


Are we in a recession?

At the time of writing this (June 2022) the answer is no. We have not seen 2 consecutive quarters of contraction. However, it is widely believed that the UK is heading towards an official recession. It is only when the data is published that we will know officially. 


Are we headed towards a depression?

Highly unlikely. Following the Great Depression that hit the world in the late 1920s to the early 1930s, governments and economic policymakers put in place safety nets that prevent a depression ever to happen again.

For instance, laws and policies had to be placed to intervene in the situation, such as creating artificial economic demand to fuel employment.

To this day, these changes in economic policies are still in place and are the ones that are safeguarding us from another depression.

 Hello! 

I'm Annette Ferguson

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.

>