Friday, 5 December 2008

Recession Vs. Depression


Having participated in an economic/investment event yesterday, the question sprang to mind of exactly when is a downturn a recession and when is it a depression.
We all know that a recession is when we have 2 quarters of negative growth in succession, also that the Brazilian official numbers are a touch optimistic, ipso facto Brasil should be there at the end of the first quarter next year, assuming negative growth Q4 2008 and Q1 2009.
This should be a little different from the government figures of 5.1% this year and 2.8% next year, however we are looking to 1.5% still in 2009, call me conservative.

The term "depression" is bandied around willy nilly, but few seem to have a good and less woolly definition of exactly what it constitutes.
For Wikipedia it is "a sustained, long downturn in one or more economies. It is more severe than a recession, which is seen as a normal downturn in the business cycle.
Considered a rare but extreme form of recession, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations.

Taking the 6 main points; High increase in unemployment, credit problems, investment and output shrinkage, bankruptcies, reduced trade/commerce and currency fluctuations, the US and Europe seem to qualify. The only factor unapparent so far is the "sustained" part which is obviously subjective (how long is a piece of string) and needs a bit of time to happen, so assuming things carry on into 2010 I presume we could be there officially.

The best definition I heard for the difference between recession and depression is as follows:
Recession is when your neighbour loses his job, depression is when you lose your job. I guess one positive side to this downturn is that it should produce a number of new jokes.

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