Australian Economy

Recession vs. Depression – Forbes Advisor Australia

Groceries are more expensive these days. Petrol prices remain stubbornly high in Australia. Interest rates are on the march.

Thanks to these problems in not just the Australian economy, but in the US and the UK as well, more and more people are worried about the possibility of a global recession—or even a depression.

While recession and depression both describe periods of economic decline, these terms are not interchangeable. A depression is significantly worse than a recession and much rarer.

Here’s a look at the key differences between them.

Recession Definition

Although the Reserve Bank of Australia states there is no single definition of recession, it acknowledges that different descriptions of recession have common features involving economic output and labour market outcomes.

Meanwhile, the official definition in the US comes from the National Bureau of Economic Research (NBER).

The NBER defines a recession as a period of significant economic decline that affects multiple segments of the economy and lasts more than a few months.

Recessions are characterised by the following economic developments:

  • High unemployment. In a recession, unemployment rates rise as companies lay off workers to adjust to declining demand.
  • Falling home sales and prices. Recessions typically lead to a decrease in home sales and prices, as buyers have less money available and are more cautious about making big purchases.
  • Stock market declines. Stock prices fall as investors lose confidence in the economy as a whole and companies’ ability to make profits.
  • Stagnant or decreasing wages. In a recession, wages often stagnate or decrease as companies try to cut costs.
  • Negative gross domestic product (GDP). The combination of the factors above means that consumers spend less, driving down demand for goods and services. As a result, the GDP contracts during a recession.

Recessions are a normal part of the economic cycle, and most economists recognise that there have been several episodes of weak economy activity in Australia which would be defined as recessions.

However, as the RBA explains, there are also some episodes of weak economic activity where there is disagreement among economists about whether these were recessions, in part because of the different definitions of recession that can be used.

What Is a Depression?

While people often worry about economic depressions, they are much rarer than recessions.

Definitions vary, but a depression typically refers to a severe and long-lasting economic decline that can affect several countries simultaneously.

During an economic depression, unemployment rates rise into the double-digits and stay there for years, leading to a complete collapse in demand for consumer goods.

As a result, companies reduce production or shut down manufacturing facilities, with fewer exports.

The Great Depression is a paradigmatic example. It lasted from 1929 to 1939 and was devastating in terms of its severity and impact across the globe. During the Great Depression, the US faced:

  • Skyrocketing unemployment. At its worst point, nearly 25% of the labor force was unemployed. Approximately 12.8 million people were out of work.
  • Plummeting wages. People who managed to keep jobs earned significantly less than before the Depression. Wages fell 42.5% between 1929 and 1933.
  • Significant declines in GDP. Real GDP fell 29% between 1929 and 1933.
  • Widespread bank failures. Approximately 7,000 banks, nearly a third of the banking system, failed between 1930 and 1933.

Australia was less affected than the USand many other economiesyet still experiences severe social and economic consequences of The Great Depression, including an unemployment rate that reached 30% according to the official Australia Year Book of 1933 records.

How Does a Recession Differ from Depression?

Depressions may sound similar to recessions but tend to be much more severe. Most importantly, they tend to last for a much longer period of time.

To put it into 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 notably severe compared to other recessions.

The Great Recession had a major impact on the economy. But even though it was incredibly harmful, it didn’t come close to the severity of the Great Depression.

In Australia, the GDP only declined in one quarter, and the unemployment rate increased to 6% compared to the 30% of the Great Depression.

The RBA states that during the Great Recession, the Australian economy fared much better than most due to a sound financial system, relatively large exposure to the buoyant Chinese economy, and strong macroeconomic stimulus that could cushion it from the global downturn.

Could Another Great Depression Happen?

Could another depression occur soon? The short answer is no. Various measures have been put in place to prevent another depression from happening.

During the Great Depression, the US Federal Reserve failed to take action to control the money supply and prices, resulting in deflation. Since then, the Federal Reserve has taken a much more active role in managing and preventing an economic crisis in the US.

Here in Australia, government and policy makers also enacted responses to ensure the economy would not suffer a major downturn: the RBA cut interest rates by 100 basis points; the government announced a $10.4 billion stimulus package for pensioners, low-income families and to support housing construction; and the Australian Prudential Regulation Authority (APRA) implemented stronger global banking regulations.

Following the GFC crisis, for example, both APRA and the financial market and corporate regulator, the Australian Securities and Investments Commission, also acted to strengthen lending standards and make the financial and private sectors more resilient.

Similar systems were put in place in the US, with fiscal stimulus—aka stimulus checks—announced 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.

Dodd-Frank reforms affected the entire US financial system, including banks, investment firms and insurance companies, with the goal to make 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 the measures put in place by various governments that have allowed the global economy to be better equipped to weather any downturns.


Who benefits in a recession?

While the average consumer will not benefit during a recession, some industries and businesses can perform well despite the economic downturn. These include healthcare, food and freight, as they are inelastic industries that remain essential.

Can a recession lead to a depression?

Which is worse, recession or depression?

Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button

Get our latest downloads and information first. Complete the form below to subscribe to our weekly newsletter.

    Input this code: captcha