Accountancy Resources
Over the past few years, the terms depression and recession have featured prominently when discussing the economies of many countries. While they are often used nearly interchangeably they do technically refer to two different things when it comes to economic downturns. This article will discuss the specific concepts so you can clearly distinguish between a depression vs. a recession.
A recession is an economic term that refers to when an economy has been in decline for a sustained period, usually of at least a few months.
The general rule of thumb for identifying a recession is when there has been a decline in GDP (or a comparable economic metric) for at least two consecutive quarters. This is not set in stone, however, as there isn’t truly a single definition of what recession actually means, and different countries and economists may use varying criteria.
The most recent example of this occurring would be after the financial crisis of 2007-2008. As a result of the financial crisis, many countries around the globe faced conditions that would generally be considered to be a recession, which has resulted in this specific event being called the global financial crisis or the global recession. Even countries that technically didn’t see a GDP decline saw their GDP growth rates slashed due to the fact that their neighbors and trading partners were in a recession.
A depression is an economic term that is typically used to refer to a far more drastic decline in the economy than would be seen under a recession. Additionally, while a recession may be only for two quarters or a year, a depression is considered to be a long-term event where an economy is depressed for a significant period of time. Similar to a recession there is no globally accepted definition of what a depression is, however, so there is some flexibility in terms of what may be categorized as a depression.
There is a general consensus that the last global depression occurred during the 1930s and was closely related to the stock market crash of 1929 that began in the U.S. and then spread across the globe. During the ’30s the economies of many countries saw significant declines, even leading to the collapse of some governments. The global impact of this depression carried right through to the outbreak of World War 2 and for some countries didn’t end until after the war.
Individual countries can also experience depressions, as is generally considered to be the case in Greece following the 2009-2010 government debt crisis there. Even here the debate on what the definition of a depression is has led to this being called a sustained recession, highlighting the ambiguity of the term. The closest there is to a rule of thumb in determining what qualifies as a depression is that a 10% decline in GDP (or a comparable economic metric) can be considered to be a depression. In grand terms, a 10% decline in GDP is a devastating occurrence for any countries economic health.
When considering the economic downturns that are considered a recession or a depression the only clear distinction between the two is the severity of the downturn. If a recession has gone on long enough eventually there will be claims that it is a depression, but where this line is drawn is up for debate. Obviously, neither is a good thing but this article should help in terms of determining the proper use of the two terms.
For both terms, it’s also somewhat debatable as to when a recession or a depression ends. Some consider them to end when an economy returns to a growth position, others consider it to end when a company has achieved its pre-downturn levels. Whenever you see an article referring to the end of a recession, it’s worth taking a look at the facts being quoted to see exactly what the article is using as its baseline.
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