Stagnation refers to a period of slow or no economic growth. It is a condition in which an economy encounters limited activities, inhibiting economic development or expansion.
Stagnation phases significantly affect countries, which is why central banks use different fiscal or monetary policies to prevent it from occurring. However, if appropriate policies are not implemented promptly, events like falling GDP, increase in unemployment, decrease in wages, and debt burdens can happen.
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- A stagnant economy either grows very slowly or stops growing for a lengthy period. Therefore, there are no significant changes in the stagnant economy besides people saving money out of fear for the future.
- There are various causes of Stagnation in the economy. Examples include economic shocks, the aging population, low economic growth, lack of productive growth, rising unemployment, increased interest rates, etc.
- Stagflation is the combination of Stagnation and high inflation. The recession exhibits a shrinking economy.
Stagnation In Economics Explained
Stagnation in economics exhibits a period during which the real economic growth is less than 2% or 3%. As the name indicates, it’s a period of no activity, growth, and development, a stagnant state of the economy. In other words, economic development and growth represent stagnation opposites.
Most persons who join the workforce see their wages increase during their employment. However, events like wage stagnation can occur due to the economy’s slowdown, flat growth, lack of new businesses, structural factors, globalization, high-tech automation, and the risk-averse mentality of workers. As a result, wages may not rise at all or stagnant rates. Another important phenomenon is secular stagnation. It occurs when the market economy that is normally functioning also experiences protracted periods of slow or no development. The market economy also experiences a persistent lack of demand.
The shift from Stagnation to growth is a significant subject of many discussions. Numerous geographic, historical, institutional, demographic, social, cultural, and political factors influence a country’s transition from Stagnation to development. In addition, the process of development also contributes to the transition. For instance, in the past, the population’s size and composition, technology, and technological advancement all contributed to an increase in the value of human capital in the production process. Altogether, these advancements contributed to sustained economic growth.
There are various causes of economic Stagnation, and it differs from country to country. The causes of Stagnation might differ in developed, developing, and underdeveloped countries. While industrialized countries may be concerned about an aging population and political instability, developing economies may be concerned about rising unemployment, high population growth, unequal distribution of income and wealth, etc.
- Unfavorable events like economic shocks can result in a stagnant phase.
- Governments are financially strained due to aging populations, pensions, and healthcare costs. For example, the demand for retirement homes and health care services tends to increase as the economy grows. In addition, the government has to raise the resources to pay transfer payments such as pensions to the old age population that retires. Although this isn’t always bad, economies might have trouble adjusting to industries that are increasingly driven by products and services related to older people.
- Lack of productivity growth affects the expansion of the whole economy.
- Businesses cannot improve their productivity, which puts pressure on costs and profits. As a result, the overall economy slowdowns.
- Businesses find investing more expensive when interest rates are high. As a result, many firms are discouraged from growing and developing, especially small businesses that are more susceptible to increasing rates. Again, it is a result of rising credit costs. In addition, consumers have less money to spend in the economy as they pay off more debt.
Let us look at some stagnation examples to understand the concept better:
ABC company produced 2 million motorbikes in the year 2019. They planned to produce 5 million motorbikes by the end of 2025. But after a year, the economy of the country XYZ faced an economic shock and entered into a period of slow growth rate for five consecutive years. Therefore, the ABC company dropped the plan to produce the forecasted number of bikes due to declining sales.
The Lost Decade was a period of economic Stagnation in Japan caused by the asset price bubble’s collapse in late 1991. During the 1990s, Japan’s witnessed the “lost decade,” and the nation was also not recovered from the economic impact it had in the 1970s and 1980s. It was a period of prolonged Stagnation. The failure to revive the banks was one, and misinterpreting the nature of the issues plaguing the Japanese economy was another.
Stagnation vs Stagflation vs Recession
The main differentiating points are as follows:
- Stagnant economic growth and rising unemployment
- Hard to control
- A stagnant or sharp slowdown in economic growth, high inflation, and high unemployment
- Stagnation + high inflation
- Price rises, but income is stagnant
- Rare and destructive
- May include the recession phase
- The 1970s is marked as the period of stagflation in the U.S.
- Shrinking economy
- More common
- Two successive quarters of declining GDP
- Small duration like 2, 6, or 18 months
- Inflation may fall
Frequently Asked Questions (FAQs)
Economic Stagnation, characterized by a stagnant economy and high unemployment, is a period of slow economic growth.
In 2011, Tyler Cowen wrote a booklet titled “The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.” It says that the American economy has hit a historical, technological plateau and that the elements that fueled economic development for most of the country’s history are no longer in play.
Inflation is the overall rise in prices of goods and services over time. On the other hand, Stagnation is a period of high unemployment and a stagnating economy and will result in stagflation if the situation is combined with high inflation.
This article has been a guide to Stagnation and its meaning. We explain its causes, examples, and comparisons with stagflation and recession. You can also go through our recommended articles on corporate finance –