What is... | April 26, 2012

What is a growth recession?

A growth recession is an economics term that on first reading can seem contradictory. Recession is normally the opposite of growth – the economy contracts rather than expands.


The term growth recession describes an economy that is not in technical recession but that is not expanding fast enough to keep unemployment from rising.
It was coined by the late Solomon Fabricant, a professor of economics at New York University.

Below par
A recession is often technically defined as two consecutive quarters of negative gross domestic product (GDP).
However an economy that is growing but growing more slowly than its long-term sustainable growth rate may still feel like a recession. It can seem this way even if the economy is not actually going backwards. This is because growth is so low that unemployment rises and incomes fall, creating conditions that feel similar to a recession.

Weak recovery
In March 2012, chief economist of bank BNY Mellon, Richard Hoey, said the global economy would experience a “global growth recession” that year.
Although most developed economies suffered outright recession in 2008/2009 in the wake of the financial crisis and returned to growth in 2010, unemployment continued to rise in many countries – especially in Europe.

Gizza job
In a growth recession, because the economy is growing below its sustainable rate, it is not creating enough new jobs for people joining the labour market.
Typically, people join the labour market after they finish school or higher education and start looking for their first full time job. Others may rejoin the labour market after time off. Immigration can also add to the number of people looking for work. To keep the unemployment rate from rising, enough new jobs must be created to offset the number joining the labour market minus the number leaving the labour market (perhaps through retirement or emigration).
In a growth recession, wages may not go up much because, in line with the economics of supply and demand, so many people are competing for jobs.

Price relief
A growth recession is likely to be associated with minimal price rises because people do not have so much to spend, meaning inflation could well remain low. This suggests households lucky enough to have secure jobs in a growth recession may find their real incomes and spending power increase.
For borrowers, there could also be a silver lining as the lack of inflationary pressure means central banks would be likely to keep interest rates low.
Growth recessions may not grab the headlines in the way a full blown recession does – but they have a wide range of implications nonetheless.

EconomicsJobsRecession

Phil Thornton
Phil Thornton

Lead consultant at Clariti Economics

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