What is 'Stagnation'

Stagnation is a prolonged period of little or no growth in an economy. Economic growth of less than 2 to 3% annually is considered stagnation, and it is highlighted by periods of high unemployment and involuntary part-time employment. Stagnation can also occur on a smaller scale in specific industries or companies or with wages.

BREAKING DOWN 'Stagnation'

In late 2012, for example, supporters of monetary policy said the Federal Reserve's third round of quantitative easing was necessary to help the United States avoid economic stagnation.

Stagnation is a situation that occurs within an economy when total output is either declining, flat or rising just slightly. Consistent unemployment is also a characteristic of a stagnant economy, but stagnation does not constitute a recession. Instead, stagnation results in flat job growth, no wage increases and no market booms or highs. This is different from a recession, where all three of these factors may steeply decline.

Stagnation sometimes occurs naturally like in cases where the economic cycle is in a downward swing. It can also happen somewhat unnaturally as is the case with catastrophic events that don't cause a recession but do cause economic uncertainty.

Situations Where Stagnation Arises

Stagnation can happen within the normal course of the business environment. This type of stagnation, much like the business cycle it mimics, is cyclical and temporary. All economies face natural periods of stagnation and should not be alarmed if the gross domestic product (GDP) is flat in the short term.

Stagnation can happen in an advanced economy with mature economic growth. When stagnation occurs in a stable economy it can be much more permanent than when it is felt during the normal business cycle. Classical economists refer to this type of stagnation as a stationary state, and Keynesian economists think of it as the secular stagnation of an advanced economy.

Conversely, it can also happen in underdeveloped or emerging economies. This type of stagnation persists due to the lack of change in traditional culture where there is no incentive to adapt and grow. Additionally, emerging or underdeveloped economies may be in a state of static equilibrium, where it is nearly impossible to raise the aggregate level of income, even though there is an active desire to change. Static equilibrium is negative and causes long-term stagnation.

The final two situations where stagnation arises occur due to external or internal forces and that not necessarily economic factors. War and famine, for example, can be external factors that cause stagnation. Also, situations where an economy decreases its inherent entrepreneurial vigor or desire to achieve high-growth represent internal factors that can cause stagnation.

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