Recession vs Depression: Key Differences and Response Strategies in Recent Years

What is a Recession?

A recession generally refers to a period when an economy stops growing. Most financial institutions define a recession as a phenomenon of declining economic activity. Typically, recessions are measured in terms of months. Generally, governments define it as a recession when the Gross Domestic Product (GDP) records negative growth for two consecutive quarters.

A recession can be limited to one region or country. To identify a recession, one must look at the economy of the entire country. The National Bureau of Economic Research, a non-governmental organization based in the United States, defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months." Various criteria such as intensity, duration, and degree of diffusion are needed to reach a recession.

Economies have cycles, and recessions are often predictable. Recessions can mean wage stagnation, rising costs, and decreased consumer spending. For those seeking economic freedom, a recession can also be seen as an investment opportunity. Understanding the cyclical nature of economic downturns helps investors and policymakers prepare appropriate responses and mitigation strategies.

Causes of Recession

There are several factors that trigger recessions. These include the collapse of asset bubbles such as real estate and stocks, slowdown in manufacturing, and loss of consumer confidence. Stock market crashes or high interest rates can also trigger such situations.

In recent years, the global COVID-19 pandemic caused many businesses to close, resulting in a sharp increase in unemployment rates. People without income saw their debt increase, leading to economic contraction. However, in the case of the United States, the government injected enormous amounts of money into the market to stimulate the economy. This monetary intervention demonstrated how modern governments attempt to counteract recessionary pressures through fiscal and monetary policy tools.

Characteristics of Recession

Recessions are accompanied by the following situations:

• High unemployment rate: Businesses lay off workers to respond to decreased demand during recessions.
• Decline in real estate/housing prices and sales volume: The property market typically experiences significant downward pressure.
• Stock market decline: Investors lose confidence in the economy. Companies also fail to generate profits, leading to widespread market pessimism.
• Wage decline: Consumer income stagnates or, more severely, wages decrease, reducing overall purchasing power.
• Negative GDP: Consumers reduce spending. Demand for goods also decreases, creating a downward economic spiral.

It's important to remember that recessions occur during economic cycles. Since the end of World War II, there have been 13 recessions. One of the most significant recessions was the 2008 global financial crisis. It started in December 2007 and ended two years later in June 2009.

The cause was subprime mortgages. The complete collapse of the housing market triggered the global financial crisis. The 2008 statistics reveal the severity:

• Half of all American households lost 25% of their wealth.
• A quarter of households in the United States lost 75% of their wealth.
• More than 8.7 million jobs disappeared from December 2007 to 2010.

The global financial crisis had a terrible impact on all sectors of the economy, but it should not be confused with an economic depression.

Key Differences Between Recession and Depression

As explained above, a recession refers to a downward trend that is part of the economic cycle, characterized by unemployment and reduced production. It features declining household income and delayed investment.

A depression means a severe recession. It is characterized by a sharp decline in industrial production, widespread unemployment, and a significant decrease in international trade and capital movement. Businesses reduce production and close manufacturing plants, leading to decreased exports.

It should be noted that a recession is not the same as a depression. Additionally, while a recession can be regionally limited (confined to one country), a depression can affect multiple countries (e.g., the Great Depression of the 1930s). The scope, duration, and severity distinguish these two economic phenomena fundamentally.

The Great Depression of the 1930s

The Great Depression lasted from 1929 to 1939 and brought tremendous consequences in terms of its severity and impact. The Great Depression was the worst economic downturn in history. It started as a recession in the United States in 1929 and spread to other parts of the world, especially Europe.

During the American Great Depression, the following problems occurred:

• Soaring unemployment rate: Nearly 25% of the labor force was unemployed.
• Wage decline: Even those lucky enough not to lose their jobs began earning less than before the Great Depression. Between 1929 and 1933, wages fell by 42.5%.
• GDP decreased significantly: Economic output contracted dramatically across all sectors.

Between 1930 and 1933, during the Great Depression, many banks went bankrupt, creating a cascading financial crisis.

Like any economic crisis, there was not just one cause for the Great Depression. Several events worked in combination, including the 1929 stock market crash and the severe drought of the 1930s.

Even before the Great Depression occurred, the economy was already declining. Unemployment was rising and manufacturing was declining. However, stocks were overvalued. On October 24, 1929, also known as 'Black Thursday', investors sold off approximately 13 million shares. Starting from this day, debt increase, foreclosures, and bank failures began.

Recession vs Inflation

Inflation refers to the increase in the cost of goods and services in the economy over time. As a result, the value of currency decreases, allowing the same amount of money to purchase fewer services and products. Economists say that moderate inflation can help economic growth. However, high inflation does not help ordinary consumers and savings.

Inflation occurs due to increased demand for services and products. When demand increases and exceeds supply, prices rise. Inflation can be expressed as a percentage. Inflation means a decline in the purchasing power of currency.

Types of Inflation

• Demand-pull inflation: This appears as a gap between the demand and supply of goods and services. It is inflation that occurs when there is more demand than the economy can produce.
• Cost-push inflation: This refers to inflation where the price of final products rises due to increased production costs.
• Built-in inflation: This refers to past events affecting the present. Workers may demand wage increases, which can lead to rising prices for products and services.

When asset values rise, inflation is favorable to asset owners. It is not favorable to those holding cash because the value of currency decreases. Generally, inflation should be controlled through monetary policy, where central banks determine money supply and interest rates through monetary policy.

What is Stagflation?

Stagflation, also called inflationary recession, refers to a period when economic activity decreases despite high inflation. During this period, unemployment rates appear high. Economists say stagflation is difficult to manage. This is because policies that might help certain situations can actually worsen other situations. After the oil crisis of the 1970s, stagflation has repeatedly occurred in the global economy.

One of the most prominent theories explaining the cause of stagflation is oil prices. When oil prices suddenly rise, the economy's production capacity decreases. A representative example is the oil embargo imposed by the Organization of Petroleum Exporting Countries on Western countries in 1973. During this period, transportation costs increased, making product production more expensive. For example, the cost of transporting products to shelves became quite high. In this process, many people were laid off, but prices rose. However, there is also the opinion that sudden oil price increases did not simultaneously cause inflation or recession.

Experts point to other causes such as poor economic policy and the weakening of the gold standard. National currency systems generally operate based on specific currencies such as gold. However, as this gold standard faltered, prices changed according to each government's market policies or economic conditions. This means that the value of currency is no longer fixed and can fluctuate.

Recession vs Depression vs Stagflation

Recessions are an unavoidable part of daily life. During this period, we can see economic activity decreasing. If unemployment rates rise, an extremely dangerous depression can begin. If a recession is prolonged, it can also affect the international economy.

Stagflation is more than just a combination of low economic growth and excessive inflation. When stagflation occurs, consumers adjust their economic behavior in response to monetary policy. This can cause prices to rise regardless of unemployment reduction. During stagflation, governments try to stimulate the economy through expansionary monetary policy. However, it may not lead to actual growth and may only raise prices.

Impact of Recession and Depression

To survive these crises, one must first clearly recognize the objective situation. Recessions occur regularly in all economies and usually last from a few months to a few years. The problem is that if a recession lasts too long, it can lead to an economic depression. The last depression the world experienced was the Great Depression of the 1930s. However, many experts say there is no need to view the current situation so bleakly. However, since the inflation rate is still high, consumers must take appropriate measures to protect their household economy and watch the overall economic trend.

Recession and Bitcoin

Some investors argue that gold or Bitcoin can serve as investment havens when fears about investing during recessions arise. For example, investment management company VanEck predicts that Bitcoin ETF approval could make Bitcoin an alternative to the Federal Reserve's money printing during recessions. However, other investors counter that Bitcoin still does not receive as much trust as gold. For example, in early May 2024, due to continued inflation rise in the United States and the Federal Reserve's interest rate freeze, concerns about stagflation arose, causing Bitcoin, which had risen to $73,000, to fall to $60,000.

Meanwhile, Bloomberg analyst Mike McGlone warned in an interview with the media in July 2023 that "the asset market, which had been sustained by liquidity injection, fell into a major crisis due to the sudden interest rate hike," and "if a recession comes, all cryptocurrencies that rose will fall." However, he said that in the case of Bitcoin, it showed excellent growth during recessions. McGlone argued that "during the 2008 global recession, Bitcoin prices rose along with gold," and "Bitcoin will show excellent growth during recessions."

FAQ

What is the core difference between Recession and Depression? How to distinguish between them?

Recession is a short-term economic decline with limited scope and duration, characterized by GDP contraction and employment loss. Depression is a severe, prolonged economic downturn lasting years, with deeper output decline, sustained high unemployment, and prolonged investment stagnation.

How long do economic recessions typically last? What are the main changes in key economic indicators?

Economic recessions typically last 2 to 18 months. Key economic indicators show changes in GDP growth rate, unemployment rate, and inflation rate. These metrics decline during recessions and gradually recover as conditions improve.

What are some famous economic recessions and depressions in history, and what are their characteristics?

The Great Depression of the 1930s caused massive unemployment and economic collapse. The Dot-com Bubble burst in the early 2000s led to sharp stock market declines. The 1873-1896 Long Depression featured price deflation and slow growth despite production increases. Key characteristics include sustained price drops, widespread business failures, high unemployment, and reduced consumer demand across multiple sectors.

What policies do governments and central banks typically adopt to respond to economic recessions?

Governments and central banks typically respond to economic recessions through monetary easing and fiscal stimulus. Central banks lower interest rates and implement asset purchase programs. Governments provide direct financial support to individuals and businesses through stimulus packages and subsidies.

How should individuals and enterprises protect their assets and business during a recession?

During recession, reduce expenses and optimize asset allocation while maintaining emergency savings. Enterprises should streamline operations, cut unnecessary costs, and preserve capital. Individuals should increase savings, reduce debt, and diversify holdings across stable assets and defensive investments.

What are the differences between the 2008 financial crisis and the economic recession during the 2020 COVID-19 pandemic?

The 2008 crisis stemmed from housing bubbles and excessive leverage, while COVID-19's recession resulted from pandemic shutdowns. The Federal Reserve responded faster and more intensely in 2020, expanding its balance sheet by 80% in three months versus gradual expansion during 2008.

How to advance early warning of economic recession through economic data?

Monitor key economic indicators including unemployment rate, industrial production, retail sales, and new orders. Sustained declines in these metrics typically signal approaching economic recession, enabling advance prediction and strategic preparation.

What are the specific impacts of recession on employment, real estate, and stock market?

Recessions typically reduce employment as companies lay off workers, decrease real estate prices due to reduced demand, and cause stock market declines from investor pessimism. Housing demand contracts, wages stagnate, and asset values fall across sectors.