Recession vs Depression: What’s The Difference?

The fluctuating global economy has made the issue of recession vs depression relevant. It is important to make a clear distinction between these terms. This will help determine how a country’s economy stands against other nations. Below, we will first analyze the concept differences between recession vs depression. Then, explain how to identify and navigate them. If this is something you’re interested in, let’s start!

Recession vs Depression

How is recession different from depression?

The first thing to note about a recession is that it is an economic downturn. It triggers a country’s Gross Domestic Product (GDP) to run in the negative, usually over several quarters. This results in lower employment rates and unstable prices for longer than a few months.

A depression, on the other hand, is a prolonged version of a recession that brings about more harmful effects. It typically arises whenever a country’s GDP suffers a sharp decline which continues for a prolonged period of time, normally over numerous years. Then, its impact extends to both domestic and international trade. It can have disastrous effects on employment rates and prices.

To better understand the difference between recession vs depression, consider the following pointers. For one, a recession is localized, while depressions have a more global impact. Another key difference between these two terms is their duration. A recession-induced economic decline typically lasts for months, but a depression can go on for years. However, what makes a depression worse than a recession is how hard-hitting its impact is. Its effects persist even after the affected country’s economy picks up. Often, it can take a long period of time to rebuild an economy after a depression.

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Are we in a recession or depression?

Annual projections show the global economy tipping toward a recession in 2023. Most World Economic Forum poll respondents believe an incoming recession exists. In fact, with mass layoffs and collapsing banks, it’s possible we are already in a recession in Canada and other parts of the world. To support this argument, the IMF released a report. This report predicted a slowed-down global economic growth from its present 3.4% to 2.9%. But, on the brighter side, the fund does not believe global GDP will shrink. The organization expects this slowed growth to be more pronounced in developed economies.

The typical consequence of these increased borrowing costs is a recession. Several surveys even reveal that the general public fears an incoming recession. With the present position of things, it is easy to see why. Several labor markets show resilience in light of this. But, the Russia/Ukraine war remains one factor that threatens global economies. If the war intensifies, we may witness a threat to global stability. It will even have far-reaching effects on the energy and food industries.

The Canadian economy usually does not experience the same economic highs and lows that the United States experiences. However, if the US incurs a recession, or worse, depression, it usually has an impact on Canada, as well as other parts of the world.

economic recession depression infographic

Is Canada in a recession?

Deloitte released a report forecasting an economic recession in Canada in 2023. However, the firm suggests this recession will not be as hard-hitting as in the past. They linked it to increased household spending in the third quarter of 2022. Canadian households typically spend most of their income on debt servicing. Also, considering their reduced purchasing power and increased living costs — you can see how a recession is inevitable. But according to Oxford Economics, this mild recession has already started. They further predict that it will spread across most of the year. 

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What are the signs of an economic depression?

It is not out of place for a country’s economy or financial market to experience a rough patch. But, this decline does not mean the country is experiencing a depression or recession, as the case may be. Thus, a bad week on the stock exchange market does not mean the country’s economy has taken a downturn.

Here are some major pointers that show when a country is in an economic depression:

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Lack of Buyer Confidence

Lower buyer confidence is a global sign of an economic depression. When the buyers lose confidence, they will no longer demand goods and services as usual. As a result, prices will start to fall, and the country’s GDP will decline. The country’s economy can weaken when this happens in a loop over a prolonged period. Then, it plummets into an economic depression.

Increased Unemployment Rate

Another sign of an economic depression is an uptick in unemployment rates. As stated earlier, it starts with lower buyer confidence, translating to lower sales. Thus, companies have no alternative but to slash their labor and production budgets. The best way to manage costs for these companies is to conduct frequent layoffs. As more people lose their jobs, unemployment rates increase. This results in many fighting for limited employment slots. Over time, the average person’s purchasing power reduces, affecting the country’s GDP.

High Inflation or Deflation Rates

An economic depression is similar to placing a recession under a magnifying glass. Thus, whatever symptoms are frequent during a recession become heightened in a depression. Between 1929 and 1941, the global economy fell into a depression. This forced many banks to close down due to citizens lacking money to deposit in banks. The lack of disposable income had strong links to unemployment and lower incomes. As a result, purchasing power was reduced, and the demand for goods and services went with it.

Loss of Asset Value

An economic depression is often characterized by financial assets losing their monetary value. For example, in the face of an economic crunch, the stock market is often the first hit. As a result, stocks and other assets lose their worth. The real estate market is another sector that suffers from an economic depression. Since potential purchasers have lower buying power, house prices plummet. While it may be a good time to make a real estate investment, not many people can afford it during a depression.

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What is the best asset to own in a depression?

Generally, no depression-proof assets exist. However, some assets perform better than others during an economic decline. These include cash—an emergency stash and sector-specific stocks, like healthcare stocks. 

Other assets to hold are energy, consumer staples, and utilities. These are things where demand remains stable, even in a financial downturn. Gold is another asset that is good to own in a depression. For one, it is a natural asset that never loses value, even during a financial crunch. History has shown that in a depression, the value of gold stays constant or appreciates. So, holding some gold during a depression would not hurt.

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Who benefits in a recession?

Despite the hard-hitting effect of a recession, not everyone suffers the impact. For example, companies that provide high-demand goods and services benefit from the situation. 

Consider an establishment that provides basic necessities like food, pharmaceuticals and toiletries. These items are still needed, even in a recession vs depression. For this reason, those companies tend to continue to profit. In addition, with economic upheaval, those who are able to seize the moment can often ride the economic upswing when it eventually happens, if they start a business or offer an in demand skill.

For example, during the 2020 coronavirus-induced recession, physical stores suffered a natural decline. This recession was no thanks to the movement restrictions and other COVID-related limitations. However, those who were already online, or were able to move their store online quickly, did well during the pandemic. Furthermore, online vendors saw an uptick in their numbers. One of these online businesses was Amazon. The online delivery giant saw an increased market capitalization of $570 billion. Others like Apple and Facebook also enjoyed significant financial gains from the downturn. 

Do things get cheaper in a recession?

During a recession, people tend to buy less due to a lack of purchasing power. But, as businesses continue to sell less, prices fall. The result is that goods and services become cheaper.

However, this is not always the case and is rather industry-specific. For example, goods like food and petrol may not experience falling prices. Since they are essential goods, their prices may go up to meet increasing demand. In the real estate industry, the prices of houses on the market tend to crash. With reduced disposable income, homeowners may face difficulty financing their mortgages. Thus, they may elect to sell their properties to reduce their financial burdens. Consider that houses are not in much demand in a recession. Thus, these homeowners may have to lower their prices to attract buyers. This is often the factor that makes it cheaper to invest in real estate during a recession.

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How do you survive a recession?

A recession has several unintended consequences. But, with adequate preparation, one can have sufficient safeguards against its harsh effects. One of these safeguards is an emergency stash. Building a financial safety net is important before a financial crunch occurs. That way, you are never caught off guard. Often, recessions occur every 10 years, so you should prepare well in advance. Otherwise, you might end up in a position where you can’t access the resources you need to survive, or even thrive. It may also help to revamp your resume, reach out to your network, and look for new opportunities. This is especially if you work in a volatile industry with high chances of layoffs. 

Another way to survive a recession is to cut costs. Hold back on new purchases for the time being. Then, create a strict budget and stick to it, except where it is extremely important. Overall, do not panic and liquidate your assets. 

During a recession, many investors panic-sell for cash. This may make sense on paper because, with every day that passes, you watch your portfolio lose its value. However, selling during a recession means selling at a loss. So, unless you have an immediate need for cash, hold on to your assets. In most cases, their value will bounce back.

How long do recessions usually last?

The duration of a recession is determined by several factors. These include its causative factors, market conditions, and eventual government intervention. But research shows that the average recession lasts about 17 months, give or take. For instance, the 2008 recession lasted 18 months, from December 2007 to June 2009. But, in 2020, the COVID-19 recession lasted only about two months—the shortest in history.

Both terms, recession vs depression, may sound similar and relate to an economic decline. However, a recession and depression are different and cannot be used interchangeably. Both describe instances when a country’s economy declines, but with different impacts. The effect of a recession pales in comparison to depression. The latter lasts longer and has a wider spread and more severe effects. This article puts the debate surrounding recession vs depression to rest. It answers important questions and suggests the way forward.

Read More: What is a Recession in Canada?

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