Stagnation

Stagnation

Stagnation is a condition that refers to very slow or little to no economic growth. Events such as a decrease in income, increase in debt, increased unemployment, inflation, decreased GDP, and more can significantly slow down the growth and expansion of economic development needed to sustain the country. 

This will eventually lead to stagnation. To prevent this from happening, appropriate policies need to be in place. 

What Is stagnation? 

Stagnation is defined as the period when there has been no growth in the economy. If the GDP of a country or a state doesn’t report growth of more than 2-3%, then it are said to be in a state of stagnation. Stagnation can happen on a macroeconomic scale as well as an industrial scale. 

While stagnation is often seen as a bad omen, it can also happen due to a temporary situation, in case there’s an economic shock or temporary recession. It could also happen when there’s a reconditioning of the economy’s long-term plans. 

Understanding stagnation 

The total output of an economy is calculated every year and if the total output is growing at a very slow rate, flat, or decreasing year after year, it is said to be in a period of stagnation. There are several factors that could trigger a stagnation period, and that includes persistently low employment rates; decrease or no growth in income; lack of stock market booms, and more. If an economy is moving from a recession to growth or vice versa, a period of stagnation is expected. However, if appropriate policies are set in place, this period of stagnation could be cut short. 

Types of stagnation 

There are three types of stagnation and each of them has a unique effect on the economy. 

  • Cyclical stagnation: Cyclical stagnation refers to temporary stagnation that happens when the economy goes through a cycle. This cycle could be the end of the recession and the beginning of recovery or vice versa; and in between this cycle, a period of stagnation can occur. However, this period of stagnation can be cut short if proper fiscal and monetary policies are put in place at the right time. 
  • Economic shocks: Economic shocks are not new and have happened in the past and are still happening. Events like geo-political wars, trade wars, significant changes in Federal Reserve rates, sanctions, fall of stocks, and more can send shockwaves in the economy leading to recession and/or a period of stagnation. 
  • Structural stagnation: Whenever there’s a new long-term restructuring plan in progress, a period of stagnation is bound to happen. The long-term restructuring plan that is in progress will bring new economic opportunities and growth, but until the plan is fully established, a period of stagnation is to be expected. However, this is a temporary stagnation that can be reduced depending on the policies that are put in place. 

Importance of stagnation 

Understanding the importance of stagnation is crucial if you plan to overcome or reduce the period of stagnation. Stagnation in the long term could severely impact the socio-economic status. Stagnation is measured by the slow change or growth in the GDP. If there’s less than 2- 3% of growth in GDP, then it is said to be in a state of stagnation. To overcome stagnation, the government need to implement a new long-term restructuring plan that needs to include the following aspects. 

  • Increase Government spending: Government investments in new businesses will not only lead to more job creation but will also lead to more cash flow, which can then be further invested. 
  • Decreasing taxes: Lowering taxes would mean businesses will be able to retain more profit and improve the growth of the economy. 
  • Lowering interest rates: More interest rate means more savings, but during a period of stagnation, there needs to be more spending. Lowering the interest rate would push people to spend more, leading to more cash flow. 

Example of stagnation 

The Great Recession that happened in 2018 is one example of long economic stagnation, which was ending until the pandemic happened, further slowing down the growth of the economy. The GDP growth was measured at around 2.3%, which was considered to be low enough to be seen as stagnation. The Great Recession was destructive for the economy and to ensure something like that doesn’t happen in the future, the Federal Reserve’s monetary policy was updated to include quantitative easing.

Frequently Asked Questions

During the period of stagnation, stock prices flatline or decline. The same goes for mutual funds and ETF prices, which could seriously affect the morale and confidence of investors. Since the market is volatile, even more so during the stagnation, investors could panic and will react to it quickly by pulling their money out of the market. This will further disrupt the stock market. 

During a period of stagnation, it is difficult for a company to generate a great profit, and can lead to mass layoffs. The security of one’s job could be in question, leading to a higher unemployment. People then have no other option than to seek jobs that may pay lower wages. 

During periods of stagnation, the average GDP growth is below 2-3%. The effects of such stagnation are felt by the entire economy and every industry. Even the stock market sees fewer gains and in the worst-case scenario, the stock market could crash completely. 

According to textbooks, stagnation is a condition, where the total output of the economy is either receding or increasing at a very gradual rate. A higher unemployment rate is a direct side-effect of a stagnant economy. 

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