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What is a Recession & a 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 characterized 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, paralyzing 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 stabilize again gradually.

Indicators and Effects: Like what was 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?

Sadly, yes. Before the Coronavirus crisis, the economy has been in expansion since it picked up in 2010. Experts were saying that a contraction was just around the corner, even though figures indicate the opposite. GDP was still on an incline, albeit at a measly 0.1% in February. Then Coronavirus happened. 

Chancellor Rishi Sunak said last May 13, 2020, that the UK is very much likely in for a deep contraction, which began in March when Coronavirus impeded the nation its capacities to work. We are already in the middle of it, as the economy shrank by 2% at the end of the first quarter of 2020.

Are we headed towards a depression?

Highly unlikely. Following the Great Depression that hit America and 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.

How do I move in a Recession?

Your mindset during this Coronavirus recession should be that of staying healthy and doing what you can with the limited mobility this crisis is granting us. The first step is to reduce your spending, both in your personal and business cash flows. If you can, increase your income. There are ways on how to manage your money in a recession, but the fundamental principle is to keep a diversified portfolio. Make sure you work with a professional in managing your finances during these uncertain times; you wouldn’t want to be making blind decisions.

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