Recessions & Depressions: What’s the Difference?

Recently the global economy has been in crisis due to COVID-19. When you start following the news you hear a lot of “we are facing a recession” and “no we are in an economic depression”.

Since the two terms are somewhat similar and may be confusing Faydety decided to explain the difference to clear any confusion and explore whether Egypt is facing an economic recession or an economic depression.

Economic Recessions:

Recession means a decrease in sales when compared to the amount of goods and services available on the market. In other words there is an imbalance between supply and demand were supply far exceeds demand (general public’s desire or ability to buy goods or services).

This imbalance can last anywhere from six months to two years. As a result companies are forced to lay-off employees; which in turn leads to an increase in the unemployment rate.

Many economists believe that recessions are a normal part of the economic cycle which goes through its ups and downs.

How does a recession occur?

Any economy must be balanced. Economic growth depends on the balance between supply and demand of goods and services. As an economy grows the income and consumer spending increases along with it but of course it isn't as simple as that. 

Economies grow but they must also experience a stage where things slow down which can occur due to something as simple as an increase in the production of goods and services more than the demand.

“Simply put an economic depression is an extreme recession that lasts for three to four years.

Economic Depression:

An economic depression is the result of an extremely severe and long recession. The economy as a whole weakens and the GDP decreases by more than 10% for more than two years.

This leads to the decrease in prices of stocks and company profits as well. As a result some companies may lay-off employees and this means an increase in unemployment rates. Some companies may also establish hiring freezes and salaries may even decrease as well.

A lot of companies are unable to withstand economic depressions and declare bankruptcy. A depression hits much harder than a recession and its effects can last for many years. Economic depressions are veritable nightmares for bankers and financial sector employees.

How does an economic depression occur? 

Several factors must occur for an economic depression to take place such as huge increases in supply with decreasing demand and lower spending rates by the public. This causes investors to panic and they start to rethink investing in an economy. As a result the economy’s growth slows down, unemployment rates increase, salaries stagnate and the purchasing power of consumers also decreases.

 An economic depression is an extreme recession that lasts for more than three to four years.