What is Stagnation?

Economic stagnation is like a person who works at a dead-end job…

The person working at the job earns a regular paycheck, but their pay and benefits don't increase — or only increase very slowly. In reality, their salary may be going down over time due to inflation. In order to escape this stagnation, the person needs to take action, whether it be going to school or a training program or looking for a new job that has better prospects for the future. Similarly, a country going through stagnation may attempt to revive their economy through government interventions.

Stagnation happens when something fails to change for better or for worse. Instead, it stays the same. In economic terms, a stagnant economy is one that doesn't shrink or grow, or that grows very slowly.

Stagnation usually brings increases in unemployment and falling wages. Modern economies rely on constant growth to provide jobs and increasing wages to support a growing population. If a population grows while its economy stagnates, individual workers will find it more challenging to compete for jobs and wages.

Stagnation can be temporary as a part of typical economic cycles, or it can be a long-term phenomenon, as Japan experienced during its Lost Decade between 1990 and 2000.

A stagnant market is like a stagnant economy. It is a market that neither grows nor shrinks. Instead, it stays roughly the same. The market values of companies do not change, and the companies competing in the market remain the same.

A stagnant market can make it difficult for investors to make money because the securities they buy fail to change in price. The stock market sees few gains and stock, mutual fund, and ETF prices often hold steady or fall slightly during stagnation.

The markets for specific goods can also become stagnant, meaning that the companies in those markets fail to see the growth that they once did. This trend typically occurs as markets mature, and there are fewer innovations to find. For example, between 1960 and 1975, coffee consumption dropped by 3.2%. Some years saw small increases, and others saw small decreases, but the overall change was negligible.

As markets for specific goods grow stagnant, competition can become more fierce. In growing industries, businesses can expand without stealing market share from competitors. When markets are stagnant, the only way to grow is to take customers from the competition.

An example of this is the cigar industry. As the market began to stagnate and shrink, the number of cigar producers fell from 283 in 1958 to 132 in 1972. At the same time, the market share of the three largest companies grew, increasing from 47% to 67% between 1960 and 1976.

One type of stagnation is cyclical stagnation. Economies go through regular cycles of growth, stagnation, and recession. As an economy moves from a recession to growth or from growth to a recession, it may experience a time of stagnation. There can also be periods of stagnation between periods of growth or recession.

Major economic events can also set off stagnation. If a country goes to war, its economy must change rapidly to support the war effort. The shock of these changes may cause the economy to stagnate. For instance, changes in the prices of essential imports, like oil, or major exports may lead to stagnation as the economy works to adapt to price changes.

Finally, structural issues within an economy can lead to stagnation by discouraging innovation and growth. Government regulations that make it challenging to start new businesses can reduce growth and lead to stagnation. Societal changes, such as lower immigration or birth rates, can also slow growth.

Stagnation has multiple effects, the primary ones being increasing unemployment and falling wages.

As economies stagnate, the number of jobs in the economy stays roughly the same. At the same time, populations tend to grow as babies are born and people immigrate. With the same number of jobs and more workers available to fill them, more people find themselves without jobs.

This glut of labor leads to lower wage growth or shrinking wages. Many workers work part-time out of necessity because they cannot find full-time work.

To deal with a stagnant market, governments must find a monetary policy or fiscal policy that spurs economic growth.

One of the most common ways that governments try to increase economic growth is increased spending. When the government spends more money on things like infrastructure, it causes money to enter the economy, flowing to businesses such as construction companies and raw materials producers. The people who work for those companies receive compensation in the form of wages. And they in turn generally spend that money on other goods and services, and so on, letting the increased spending impact various parts of the economy.

Another way governments deal with stagnation is changing regulations or tax codes to encourage innovation. For example, tax breaks for new businesses or small business owners can keep more money in local economies or improve growth in different sectors of the economy.

Interest rates are a common tool that central banks use to affect the economy. When the central bank lowers interest rates, saving money becomes less attractive. People are more likely to increase their spending or look for investments that provide higher rates of return, such as investing in new businesses. Conversely, when rates are high, people tend to save more because the returns are attractive.

The government also uses tax cuts to try to increase growth, though economists debate the effectiveness of this strategy. Some argue that increasing taxes on high levels of income is more effective because it gives the government greater ability to spend, taking money away from groups that would be more likely to save their income than spend it in the economy.

Stagflation is the combination of stagnation with high levels of inflation. Stagnation is one part of stagflation, but the existence of economic stagnation alone does not mean that an economy is experiencing stagflation.

Stagflation is worse than stagnation. On top of the lack of growth, leading to high unemployment and low wage growth, goods become more expensive due to inflation. This inflation makes it more difficult for people to buy necessities and luxury goods. High levels of inflation can also cause savings to lose value.

Stagflation is also typically more painful to escape. Increased government spending is one of the most common strategies for escaping secular stagnation and increasing the growth rate. However, increased government spending can often increase inflation, exacerbating the problem for an economy already suffering stagflation. Similarly, increasing interest rates and reducing spending can get inflation under control, but typically causes the economy to stagnate or shrink further.

It is difficult to know what stage of an economic cycle we're in. Economies tend to go through four steps: growth, peak, recession, and trough. These stages repeat as economies grow, stagnate, and shrink. It's easy to think you're in the middle of growth when, in reality, the economy has just peaked and is about to enter a recession. Similarly, it's easy to think the current recession will get worse, only to find that things have bottomed out and the economy is about to grow.

In the United States, the National Bureau of Economic Research (NBER) officially declares recessions after "a significant decline in economic activity lasts more than a few months." Because it takes time for groups to notice changes in the U.S. economy, recessions typically aren't declared until well after they've begun.

The best you can do to determine which phase the economy is in is to look at the most recently available economic data for signs of growth or recession. It can be hard to know exactly where you are until you have the benefit of hindsight.