Recessions vs Depressions What Are Economic Recessions and Depressions? IG International

Posted May 17, 2024

The sale of stocks provides them with the funds they need to grow. Consumers will stop buying and businesses will lay off workers when there’s no confidence in the future. These situations create a downward spiral of unemployment, loan defaults, and bankruptcies. 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. But people do not turn to the dictionary for cheap puns and bad jokes (we hope); they come in search of steely-eyed realism and hard truths. So here are some things we can tell you about recessions, depressions, and the differences between the two.

This is a good question and you wont be surprised to hear that economists have different views on the distinction between the two! My answer is that the difference is a matter of degree both about the duration of an economic downturn and also the severity. The Federal Reserve and other central banks now have very sophisticated tools to stimulate the economy, so it is possible that we will never have a depression again. This was a massive economic crisis that had severe consequences all over the world, but it is still not considered long or severe enough to be termed a depression.

Both economic depression and recession are two economic concepts that have certain adverse impacts on the overall economy. Therefore, it is very important to understand features, positive and negative impacts, similarities and differences between depression and recession, especially for the investors and market plays in an economy. Economic depression is a longer-run economic phenomenon that comprises of certain long-term impacts such as unemployment, economic bankruptcy, collapsing financial markets, etc. On the other hand, economic recession is a usual phenomenon that comes with the business cycle of an economy. By carefully analyzing the behaviors of economic depressions and recessions, investors and business firms can make pre-preparation activities to minimize possible adverse impacts. On the other hand, a depression is characterized by a profound and extended drop in economic output.

Words Commonly Mispronounced

Recessions and depressions are definitely related — to understand one you have to understand the other. The world is preparing for the next global recession, but one unlike any other. This global recession is being driven by the coronavirus pandemic, whereas previous recessions have been rooted in problems within financial markets. The World Bank expects it will plunge virtually every country around the globe into a recession, but many are hoping it will be a temporary blip that can be overcome by finding a vaccine or treatment. There is no agreed definition for a depression, but it is widely considered as a more prolonged and severe form of a recession. However, the IMF says some consider a decline in GDP of over 10% as a depression.

In other words, if the NBER says we’re in a recession or a depression, we’re probably in one.
From the 19th century, depressions were directly related to commercial, speculative, and industrial factors.
A depression is significantly worse than a recession and much rarer.
The length of a recession varies depending on the severity of the economic downturn, but it doesn’t usually last as long as most people think.

Where is money safest during a recession?

Recessions tend to coincide with high unemployment, as businesses conduct layoffs to account for lower revenue and growth outlooks. “You can have job losses that persist quite a bit after an official recession ends — and you can certainly have unemployment rise well after the end of a recession,” he says. Josh Bivens, chief economist at the Economic Policy Institute, tells BI that different parts of the economy, like the job market, won’t recover from a recession at the same rate. However, there’s still some concern that we’re not out of the woods yet in making the soft landing of lower inflation without a recession.

Key differences between a recession and depression

As a result, money becomes scarce as wages drop and people spend less.
Recessions can also be more localized, while depressions can have global reach.
They look at many different indicators besides GDP, including gross domestic income, unemployment, manufacturing, and retail sales.
The 2008 recession, for example, was largely caused by a collapse of the US housing bubble.
You might also encounter the word recession in various ceremonies, such as religious services, weddings, and graduations.

A recession is a widespread economic decline that typically lasts between two and 18 months. The most famous depression in U.S. history was the Great Depression. 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 the government, the banking system is stronger and more stable, trading fractals and the economy is better equipped to weather any downturns. In response, the U.S. government intervened through fiscal stimulus measures.

The CARES Act sent a $1,200 stimulus check to eligible adults earning up to $75,000. The stock market will continue to fall if confidence isn’t restored, and the extreme loss of confidence may also trigger a recession. A crash can scare consumers, who then buy less, and this triggers a recession.

Why didn’t Trump’s tariffs spark recession fears last time?

The major stock indexes had several days where they dropped 5% or more. It’s a popular but incorrect fxcm broker review notion that two quarters of declining gross domestic product (GDP) is all you need to define a recession. For instance, GDP declined in the first two quarters of 2022, but a recession wasn’t declared. There’s a joke in economic circles that a recession is when your neighbor loses their job, and a depression is when you lose yours.

Recession Definition

During Trump’s first term, tax cuts came before the import duties. Most Americans would feel the impact of a recession in one way or another, for weaker hiring to tepid wage gains. Broad measures of the stock market — the S&P 500 and Dow Jones indexes — have fallen so far in 2025. As of mid-March, the S&P 500 has dropped more than 10% into correction territory from its previous record high of 6,144.15 on February 19.

Stay on top of upcoming market-moving events with our customisable economic calendar. Discover the range of markets and learn how they work – with IG Academy’s online course. We explain the key differences between a recession and a depression. Recession is defined as GDP fall among two consecutive quarters under consideration. For four consecutive years, the US experienced a dramatic drop in real GDP. Get a daily email with the top market-moving news in bullet point format, for free.

Other times, however, recessions can last years, such as during the Great Recession, and the recovery can take just as long. The length of a recession varies depending on the severity of the economic downturn, but it doesn’t usually last as long as most people think. NBER data finds that from 1854, the average recession has lasted about 17 months. A recession is defined as two consecutive quarters (six months) of negative Gross Domestic Product (GDP). However, some argue this definition is overly simplistic as it doesn’t factor in employment, wages, and business investments.

Definitions vary, but a depression typically refers to a severe and long-lasting economic decline that can affect several countries simultaneously. While people often worry about economic depressions, they are much rarer than recessions. Recession blonde (or recession brunette) refers to the darker, more brown-tinted hue that many are letting grow in with their normally bright, golden strands.

The banking system is much stronger than it was during the Great Depression. Since then, banks have been backed by the Federal Deposit Insurance Corporation (FDIC), and deposits are insured for up to $250,000. Various measures have been put in place to prevent another depression from happening.

The Great Depression is the only widely recognised depression on record, but there have been more recent ones if you define depressions by a 10% decline in GDP. For example, Finland reported a 14% drop in GDP during the 1990s in the wake of the Soviet Union breaking up, which disrupted trade with one of the country’s main partners. A depression will always be borne out of a recession, but there is a debate over when one ends. Some believe a depression ends as soon as an economy starts to grow again, while others think it only ends once growth and output start to return to pre-crisis levels.

A depression is a widespread, extreme recession that lasts longer and causes generational damage to Forex trading for beginners the economy. The last one in the U.S., the Great Depression of the 1930s, saw the stock market crash, banks failing, and thousands of Americans out of work for over a decade. Unfortunately, there’s no graph that economists can follow in real time to see whether or not a business cycle has entered recession. And even once it’s clear that the economy has entered decline, it’s hard to tell if the recession will be a long or short one.