What Is Negative Growth?
Negative growth is a contraction in business sales or earnings. It is also used to refer to a contraction in a country's economy, which is reflected in a decrease in its gross domestic product (GDP) during any quarter of a given year. Negative growth is typically expressed as a negative percentage rate.
Understanding Negative Growth
Growth is one of the main ways that analysts describe a company's performance. Economists also use it to describe the state and performance of the economy. Positive growth means the company is improving and is likely to show higher earnings, which should increase the share price. When an economy is growing, it is a sign of prosperity and expansion. Positive economic growth means an increase in money supply, economic output and productivity. The opposite of positive growth is negative growth, and this describes the performance of a company experiencing a decline in sales and earnings. An economy with negative growth rates has declining wage growth and an overall contraction of the money supply.
Negative Company Growth Rates and Calculation
Analysts use growth rates as a measure of performance. An analyst needs two numbers: the starting value and the ending (or most recent) value. Then, the analyst subtracts the beginning value from the ending value and divides the answer by the beginning value. The formula is: (Ending Value) - (Beginning Value) / (Beginning Value).
For example, if you own a company with sales that fall from $1 million to $500,000 in one year, you can calculate the growth rate by plugging the number into the formula. The answer is: ($500,000 - $1,000,000) / $1,000,000), or negative 0.5. Multiply the answer by 100 for the percentage growth rate, which is negative 50%. In other words, the company experienced negative growth in the previous year.
Negative Economic Growth Rates
Recurring periods of negative growth are one of the most commonly used measures to determine whether an economy is experiencing a recession or depression. The Recession of 2008, or the Great Recession, is an example of a period of economic growth measured as more than two months of negative growth. The Great Recession began in 2008 and continued into 2010. Although the announcement of negative growth strikes fear into investors and consumers, it is just one of many factors that contribute to a recession or depression.
Negative growth rates and economic contraction are also marked by a decrease in real income, higher unemployment, lower levels of industrial production and a decline in wholesale or retail sales. In situations where negative growth occurs, the real value of wages is increasing, and consumers may consider the economy to be stable or improving. Similarly, when an economy experiences both positive GDP growth and high rates of inflation, people may feel that the economy is on a decline.