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(originally published to Helium writing site, now gone)

The world economy took a giant hit in 2008 with the Global Financial Crisis or GFC. Many countries went into recession, and the word depression was even used. Here’s an article that looks at the difference between a recession and a depression.

Recession is the term used to describe a general economic downturn featuring lower than usual levels of gross domestic product (or GDP) and its components, such as consumption and investment, as well as falls in employment, income, profits and inflation. In broad terms, a depression includes all the characteristics of a recession but at a worse level and often includes additional factors such as a significant fall in asset prices, less credit, bank closures, shortfalls of goods, and deflation.

There are no official criteria separating a recession from a depression. Various benchmarks and definitions have been used over time and between places. In the United States, the National Bureau of Economic Research uses a qualitative definition of recession. It describes a recession as a significant decline in the economy of three months or more, reflected in GDP, production, sales, income and employment figures. It then uses these and other statistics and indicators to determine if the economy is in recession and the dates involved. The NBER defined the US as being in recession from December 2007 to June 2009, with GDP falling 12.8% during this period. It doesn’t separately identify depressions but acknowledges that these are severe recessions.

Other countries don’t have the services provided by the NBER and usually use a more quantitative definition of a recession, often defining it as a fall in GDP of two consecutive quarters. Interestingly, the US recession of 2000 and 2001 would not have been defined as a recession under this definition. GDP fell in three quarters but none were consecutive. Another indicator used is a rise in the unemployment rate of at least 1.5 percentage points over 12 months. The US rate rose nearly four percentage points between mid 2008 and mid 2009 to more than 9%. Sometimes an extended period of lower than usual growth is used to define a recession.

Commonly used quantitative measures to define a depression are a fall in real GDP of more than 10% in one downturn or declining GDP over a period of at least 3-4 years or more, although sometimes two years or more is used as the benchmark. The best known economic depression was the so-called Great Depression of the 1930s. Its effects were severe, prolonged and worldwide. US gross national product fell 33% between 1929 and 1933 and the unemployment rate rose to 25%. Another period of depression, sparked by speculative real estate investments, ran from 1937 to 1942.

Up until World War II, depression was the term used to describe any significant economic downturn. Many depressions were referred to as panics because they often coincided with a run on banks as people tried to withdraw their money during a sudden downturn. An early use of the term depression was in 1819 by US president James Monroe as a description of the Panic of 1819.

Many 18th and 19th century downturns were probably recessions rather than depressions but the term recession wasn’t used until after WWII. On average, pre-war depressions were considerably more severe than post-war recessions. This is because when governments in the earlier period were faced with a downturn, they made it worse by contractionary monetary policy, as well as trying to balance their budgets by increasing taxes and reducing spending, and lifting tariffs. This led to falls in wages and prices, which we don’t commonly see in recessions. Booms were also more pronounced, leading to boom and bust cycles.

After the war, major countries vowed not to allow a repeat of the depressions of earlier times and initiated expansionary economic policies during downturns as urged by leading economist John Maynard Keynes. Also, rather than dig up memories of depressions, a new word was sought, and economic downturns came to be known as recessions (recess is from the Latin “recessus”, meaning “a going back”).

The new term came with a fresh set of policy responses to downturns. Governments implemented expansionary fiscal and monetary policies to try and get the economy moving again. The general result was that post-war recessions were less severe than pre-war depressions. There have been a number of exceptions. Russia’s economy shrank nearly 50% in the first half of the 1990s, while other ex-Soviet republics were also in depression as defined above (a fall in GDP for 2-4 years, or a decline of 10% over any period). Finland’s economy contracted for three years in the early 1990s. During the Asian financial crisis of the late 1990s, Indonesia’s GDP fell 18% in 1998, Thailand’s by 15% over two years, and Malaysia’s by 11% in a year.

None of these exceptions were commonly referred to as a depression though. Indeed, they didn’t display all the usual characteristics of depressions, which include falling asset prices, reduced credit, lower prices and declining economic activity, only some of them. High inflation was a feature in the ex-Soviet states and in the Asian crisis. Japan met most of the criteria, however, when its GDP fell 1.0% between 1997 and 2001. Prices also declined 1.0%, wages were down 5.5%, bank lending decreased 16% and property and share values plummeted. But the depression word wasn’t used, and perhaps rightly so as the declines were far milder than those in many pre-war downturns.

The recession of 2007-2009, with its Global Financial Crisis, has been described as the most severe global downturn since the Great Depression and has been dubbed the Great Recession. In the US, GDP fell 12.8% and the unemployment rate blew out to 10.1%. Housing prices collapsed in many areas and several large financial institutions went under. In April 2011, 26% of Americans thought the economy was still in recession, while 29% said it was in depression. This is despite annualized GDP growth of 1.8% in the March quarter.

Thus the difference between recession and depression is hazy. NBER has a qualitative definition for a recession but no separate one for a depression. Quantitative benchmarks are used in many countries to determine the difference, although the measures are far from perfect. Pre-WWII downturns were called depressions. Since then, the term recession has been used. Whether some of the post-war downturns can be called depressions is quite subjective.