Global economic stagnation: Additional insight

Both an economic stagnation and a recession can be characterised by a significant slowdown in industrial production and innovation, a drop in earnings and consumer spending, and increased unemployment levels. Our analysis of the US economy from 1961 to 2019 showed that economic stagnation occurred in just 10 quarters, or 3.1% of the time, and there was a 30% chance of entering a recession after a period of stagnation.

All businesses take their cues from the economic conditions they find themselves in. While global stagnation would create a sense of watchfulness as companies wait and see what’s going to happen, recession would mean taking active steps to limit their risk such as laying off non-essential staff, cutting production, closing less productive sites and seeking cheaper, perhaps lower quality components.

If we can draw one positive, it's that economies do learn from previous extreme events. With each period of economic stagnation, new initiatives are put in place to prevent a similar occurrence. Whether these initiatives are wholly successful in seeing off a reoccurrence is a matter for debate.

Financial conditions can be characterised into eight economic outlooks, based on how the economy typically behaves: peak, credit crunch, contraction, stagnation, recession, expansion, acceleration and steady growth. Through scenario modelling and learning from historical precedents, risk owners can use these to assess how their future business plans will perform under these conditions.

The 1930s Great Depression was linked to labour shortages and productivity lapses. Social and employment policies and norms adopted through the 20th Century such as a five day working week, electricity and improved infrastructure reduced the risk of stagnation happening on the same scale again.

In the 1970s and 80s, Western Europe was said to be suffering from ‘Eurosclerosis’, stagnation caused by over-regulation and industry protection. In the UK, many of the country’s economic woes were laid at the feet of Unions and the famous Miners’ Strike.

Japan’s Lost Decades, between 1991 and 2003 saw the country lose gains made in the 80s from technological innovation and high productivity. Collapse in equity and real estate markets slowed growth to 1.14%, but the quantitative easing introduced to stimulate growth in 2001-02 left Japan vulnerable to a credit crunch and then the Global Financial Crisis in 2008-09.

The Financial Crisis of 2008-09 lead to billions of dollars of government support and a decade of austerity to bring global markets back to normal. Financial institutions still suffer from a lack of consumer trust forged by the crisis.

In recent times, time-tested economic models have been thrown into doubt – as stable inflation and near-constant growth have made way for soaring prices and economic pressures.

As inflation has risen dramatically across the world, financial institutions such as the World Bank, the International Monetary Fund, the European Central Bank, the US Federal Reserve, and the Bank of England have given varying opinions on the occurrence and strength of a recession, and the duration of time it will take to recover.

There has nevertheless been a marked increase in predictions of a recession, regardless of the debate on its nature by financial institutions. No consensus has emerged on the occurrence and duration of a period of stagnation either and there is general expectation of eventual economic recovery after any short periods of recession.

The caveat is that current quick fixes to avoid a recession on account of increased fears and predictions, and an increase in interest rates to slow down rising levels of inflation, may inadvertently have negative after-effects, such as economic stagnation, which may not be visible for many quarters or even a few years.