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 is an overview of the main differences between them.
Definition of recession
Although people believe that there is more than one way to define a recession, the Reserve Bank of India (RBI) defines a recession as a period of prolonged decline in output experienced across a large part of the economy. To be more concrete, commentators often consider a recession to be underway when total output (real gross domestic product) has declined for at least two consecutive quarters.
Recessions are characterized by the following economic developments:
- High unemployment. During a recession, unemployment rates rise as companies lay off workers to adjust to lower demand.
- Fall in home sales and prices. Recessions typically lead to lower home sales and prices as buyers have less cash on hand and are more cautious about making big purchases.
- The stock market goes down. Stock prices fall as investors lose confidence in the economy as a whole and in the ability of companies to make profits.
- Stagnant or declining wages. During a recession, wages often stagnate or decline as companies attempt to cut costs.
- Negative Gross Domestic Product (GDP). The combination of the above factors means that consumers spend less, which lowers the demand for goods and services. As a result, GDP contracts during a recession.
Recessions are an integral part of the business cycle. India went through four recessions in 1958, 1966, 1973 and 1980 and the most recent Covid-19 is believed to be the fifth
What is depression?
While people often worry about economic depressions, they are much rarer than recessions.
Definitions vary, but a depression generally refers to a severe, long-lasting economic decline that can affect multiple countries simultaneously.
During an economic depression, unemployment rates hit double digits and stay there for years, leading to a complete collapse in demand for consumer goods.
As a result, companies are reducing production or closing manufacturing facilities, with fewer exports.
The Great Depression is a paradigmatic example. It lasted from 1929 to 1939 and was devastating in terms of severity and impact. During the Great Depression, India faced:
- Unemployment. At worst, nearly 25% of the working population was unemployed. Around 15 million people were out of work.
- Significant declines in GDP. Real GDP fell nearly 6.4% in 1931 and about 12.9% in 1932.
- Prices. In India, wheat prices fell by 50% between the years 1928 and 1934.
- Swap. Imports and exports were almost halved during the depression.
How is a recession different from a depression?
Depressions may seem similar to recessions, but tend to be much more severe. More importantly, they tend to last much longer.
To put things 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 particularly severe compared to other recessions.
The Great Recession had a major impact on the economy. But while it was incredibly harmful, it didn’t come close to the severity of the Great Depression.
Could Another Great Depression Happen?
Could another depression be coming soon? The short answer is no. Various measures were put in place to prevent another depression from occurring.
During the Great Depression, the Federal Reserve failed to take action to control the money supply and prices, leading to deflation. Since then, the Federal Reserve has taken a much more active role in managing and preventing an economic crisis.
The government has also introduced safety nets for people who lose their jobs, in the form of unemployment benefits and fiscal stimulus, i.e. stimulus checks. These programs did not exist during the Great Depression and as a result many people were left without any income when they lost their jobs.
So, although recessions are an integral 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, and the economy is better equipped to weather any downturn.