DEFINITION of 'Contraction'

A phase of the business cycle in which the economy as a whole is in decline. More specifically, contraction occurs after the business cycle peaks, but before it becomes a trough. According to most economists, a contraction is said to occur when a country's real GDP has declined for two or more consecutive quarters.

BREAKING DOWN 'Contraction'

For most people, a contraction in the economy can be source of economic hardship; as the economy plunges into a contraction, people start losing their jobs. While no economic contraction lasts forever, it is very difficult to assess just how long a downtrend will continue before it reverses because history has shown that a contraction can last for many years (such as during the Great Depression).

  1. Business Cycle

    The fluctuations in economic activity that an economy experiences ...
  2. Economic Conditions

    The state of the economy in a country or region. Economic conditions ...
  3. Depression

    A severe and prolonged downturn in economic activity. In economics, ...
  4. Hard Landing

    An economic state wherein the economy is slowing down sharply ...
  5. Trough

    The stage of the economy's business cycle that marks the end ...
  6. Sector Rotation

    The action of a mutual fund or portfolio manager shifting investment ...
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