Since the start of the year, markets have been under pressure. Several factors have led to a global sell-off in stocks, bonds, and currencies. People are now debating about whether we are in for a recession or a slump. Recession vs. depression, therefore, is a key question on everyone’s minds these days. It is important to note the difference when you are doing your portfolio planning.
People are often afraid of recessions. However, they should not be because recessions are a natural part of the economy. It is a time when businesses have to make changes in their spending and investments to become more efficient.
Interest rates are increasing as a response to inflation. The Federal Reserve (Fed) is taking steps to combat inflation, but they are also worried about the risk of recession.
A recession is a period of negative economic growth. It is normal to worry about recessions, but it is important to prepare for them so you are not caught off guard.
Here at InvestorPlace, we’ve written different articles to help you navigate the inflationary environment to prepare for what might happen in the case of a recession.
However, this article will tell you about the difference between a recession and a slump. Although occasionally used interchangeably, these terms explain two different things. It’s important to understand this difference when deciding your investments.
Recession vs. Depression: What Is a Recession?
A recession is when the economy goes into a state of decline. It is characterized by declining production and rising unemployment.
When the recession hits, we get an economic bubble that eventually bursts, leading to severe economic depression. This recession can be measured in gross domestic product (GDP), unemployment rates, and other significant statistics.
A recession is a period when the economy experiences negative growth. A slump is when the economy experiences negative growth and there are no signs of recovery.
Many factors can cause slumps, such as:
- Economic downturns
- Financial market crashes
- Changes in global trade policy
What Is a Slump?
A slump is a period of economic decline. There are many causes, including a lack of demand for goods and services.
There are different types of slumps:
- Business cycle: A downturn in the business cycle is when an economy’s output falls below its potential output for an extended period. This type of slump typically lasts longer than other types.
- Economic contraction: An economic contraction is a decrease in production and demand that results from a recession or depression. A sharp decline in the prices of certain goods or assets, such as stocks, land, or houses, can also lead to an economic downturn.
- Economic depression: An economic depression is generally defined as two consecutive years with negative GDP.
Difference Between a Recession and a Slump
A recession is a period when the economy is declining. A slump is a time when the economy is not doing well.
A recession can happen due to a drop in economic activity, such as an economic depression, or by an external shock, such as war or natural disaster. A recession may also result from increased unemployment due to excess supply and decreased demand for goods and services.
A slump can happen for various reasons. A change in government policy, such as increased taxes or subsidies or an increase in the cost of raw materials is also a vital reason for an economic slowdown. Decreased demand due to oversupply may also lead to a slump because goods and services become less attractive to consumers.
However, after the government takes the necessary steps, it can navigate out of these issues and begin a new era of economic growth.
What Is Needed to Promote Economic Growth?
The government can end a recession or slump by implementing policies that will stimulate the economy. Some of these policies include:
- Increasing the money supply by printing more money to increase demand for goods and services.
- Reducing taxes to encourage those who are unemployed to become employed.
- Investing in public works projects, such as infrastructure improvements, will create jobs and stimulate the economy.
Recession vs. Depression: Do Not Panic
The economy is a complex system that is constantly changing. It’s not always easy to understand how the economy works, but we need to know.
The economy moves in cycles which include growth, recession, and slump. The cycle’s four phases are expansion, recession, recovery, and stagnation.
Expansion is when there is an increase in production and consumption. This phase usually lasts for a few years before entering into a recession. A recession happens when there is an economic decline because of reduced production or consumption. Recovery happens when the economy grows again after a recession or slump.
The Fed and the U.S. government are taking active steps to ensure we do not face a prolonged crisis. In the meantime, you can invest in bellwether stocks like Apple (NASDAQ:AAPL), Disney (NYSE:DIS), and Walmart (NYSE:WMT). These companies perform well regardless of the economic environment and are great defensive plays for any portfolio.
On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.