Recession/Depression?

ajc100

What is the difference, how close are we to one and what more would it take to push us in to a depression?

silverharp

if your friend is made redundant its a recession but if you are made redundant its a depression:pac: I've heard some commentators use the term Soft Depression for what maybe happening now, I think these terms can only be agreed on after the fact. The original great Depression was the 1870's then later on after the 1930's one people used that term for it.
Everything about this smells like some kind of soft derpression as opposed to a common garden recession. Financial panics like this are rare and I think history shows that these do not end quickly. This could well be a decade long affair with brief interludes where people think happy days are hear again

Time Magazine

The neighbour definition is a pile of crap.

A recession is where GDP falls for at least two consecutive quarters. We're probably looking at output falling in the region of 4% next year.

There is no formal definition for a depression. A loose definition that I've seen used more than once is when output falls by 10% or more in one year. Clearly we're a good bit short of that.

Tricity Bendix

Recessions are often defined as two quarters of negative growth. While this is a simplistic approach, I think its pretty much the only one we have. In America they have the National Bureau of Economic Research which has more stringent criteria. I don't think we have the equivalent here.

As The Economist said, there is no formal definition of what is or is not a depression. The Economist (the newspaper, not the poster) recently wrote an article on recognising depressions. Basically, they, as the poster above, mention a fall in output of more than 10% in one year, as well as another measure based on the duration of the fall i.e. a decline that lasts longer than three years.

But they also cite the idea by ANZ economist Saul Eslake that the difference between recession and depression could be a matter of what caused the downturn, not its depth on length. If I way quote a chunk of text rather than seek to explain it in my own words:

The Economist newspaper (not the poster) wrote:

A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level. In the Great Depression average prices in America fell by one-quarter, and nominal GDP ended up shrinking by almost half. America’s worst recessions before the second world war were all associated with financial panics and falling prices: in both 1893-94 and 1907-08 real GDP declined by almost 10%; in 1919-21, it fell by 13%.

The economic slumps that followed the collapse of the Soviet Union and those during the Asian crisis were not really depressions, argues Mr Eslake, because inflation increased sharply. On the other hand, Japan’s experience in the late 1990s, when nominal GDP shrank for several years, may qualify. A depression, suggests Mr Eslake, does not have to be “Great” in the 1930s sense. On his definition, depressions, like recessions, can be mild or severe.

Another important implication of this distinction between a recession and a depression is that they call for different policy responses. A recession triggered by tight monetary policy can be cured by lower interest rates, but fiscal policy tends to be less effective because of the lags involved. By contrast, in a depression caused by falling asset prices, a credit crunch and deflation, conventional monetary policy is much less potent than fiscal policy.

If one was to follow this theory, we cannot be 'pushed' into a depression. Either we're in one or we are not.

Going by the definitions I mentioned earlier, we could see GDP drop by more than 10% if there is a run on the banks followed by a loss of all them lovely jobs in the IFSC and elsewhere, leading to a collapse in demand. Or we could see a prolonged decline of more than three years if global credit remains immobile.