In recent times, the term “extremely severe long-term contraction in economic activity” has been used frequently in the media to describe the impact of the COVID-19 pandemic on the global economy. This phrase is also known as an economic depression and is defined as a sustained period of economic decline characterized by high levels of unemployment, low levels of production, and a decrease in consumer spending.
An economic depression differs from a recession in terms of duration and severity. A recession is defined as a period of economic decline lasting for at least six months, while an economic depression can last for years or even decades. Additionally, a recession is considered mild compared to an economic depression, characterized by a moderate decline in economic activity and a reduction in the Gross Domestic Product (GDP) by under 10%.
In contrast, an economic depression is characterized by a significant reduction in the GDP, increasing unemployment rates, a decline in industrial production, and a decrease in consumer spending. It typically takes a longer time for economies to recover from an economic depression than it does from a recession.
The most notable example of an economic depression in history is the Great Depression of the 1930s, which lasted for over ten years and affected the global economy. During this period, unemployment rates in several countries soared to over 20%, while the GDPs of some countries fell by over 30%. The economic depression was attributed to several factors, including a stock market crash, unsustainable economic growth, and a lack of government intervention.
The COVID-19 pandemic has triggered an economic depression in several countries, resulting in job losses, reduced consumer spending, and an overall decline in economic activity. Governments have been forced to implement fiscal policies such as stimulus packages and monetary policies like reduced interest rates to stimulate economic growth and prevent a total collapse of the economy.
In conclusion, an extremely severe long-term contraction in economic activity or an economic depression is characterized by a significant decline in the GDP, increasing unemployment rates, and a decrease in consumer spending. While recessions are usually short-lived, economic depressions can last for years or even decades, and their effects can be felt for generations. Governments must take necessary measures to prevent or mitigate the effects of an economic depression and promote a sustained economic recovery.