What Is a Sluggish Economy?
A sluggish economy is an economy in which growth is slow to negligible in macroeconomic terms. The term is an analogy to familiar species of nonshell-bearing terrestrial gastropods which move very slowly. The word "sluggish" can refer to the economy as a whole or one of its components, such as sluggish housing starts.
- A sluggish economy is an economy that is experiencing little or no macroeconomic growth.
- The term is a zoological analogy to the common slug and is not a precisely defined term.
- Sluggish economies may be characterized by falling GDP growth or high unemployment.
- Sluggish economies are generally considered bad for most businesses, yet there are opportunities for certain businesses and industries.
- Central banks may attempt to stimulate a sluggish economy through quantitative easing.
Understanding a Sluggish Economy
The term sluggish economy is a colloquial phrase frequently used in financial and business media, with no exact, quantitative definition. It is a zoological comparison to the animals known as slugs, which move very slowly, in some cases traveling at an average speed of only 0.000023 meters per second.
Like a slug, a sluggish economy is moving ahead, but very slowly. Though a sluggish economy may be used to mean slow or zero economic growth, it is not generally used to refer to negative growth or outright contraction in an economy, since slugs are physically incapable of moving backward. Note, however, that a sluggish economy is just an analogy and does not necessarily involve actual slugs.
One may, for example, see a headline like, "Economy Sluggish Due to Rising Oil Prices." Although the world economies are linked to global commodities and finance in different ways, there have been many cases of a sluggish global economy affecting all countries and most sectors.
Characteristics of a Sluggish Economy
In a sluggish global economy, many countries can still experience positive growth, but the overall pace is still slow. Both during and after the Great Recession, a sluggish American economy had a negative effect on the global economy. This is because the U.S. was the world's largest economy and a vital source of trade and investment for much of the rest of the world.
Short periods of sluggish economic growth may occur at the peak of a business cycle when the economy is transitioning from a period of more rapid growth into a recession. A sluggish economy is often considered a leading indicator of a potentially steeper downturn.
Extended periods of sluggishness can occur after a recession if the subsequent economic recovery is held up by poor economic policy or for some other reason. A sluggish economy may also occur as a persistent condition resulting from underlying structural issues that constrain economic growth, such as an aging population, the dominance of mature, low-growth industries, or government policies that discourage growth.
Debt collection, mediation, and job search services are examples of businesses that are likely to see demand increase when an economy is in the doldrums.
A sluggish economy is harmful to most businesses since consumers are less likely to purchase their products. It may also have a negative effect on the labor market as businesses are less willing to hire more staff in times of weak economic growth.
However, a sluggish economy can actually be beneficial for certain businesses and sectors. Businesses that see demand go up in weak economic conditions include debt collection, mediation, and job search services.
Recession-resistant sectors like healthcare also benefit as a sluggish economy keeps costs low, with more businesses and individuals competing aggressively for the spending dollars of organizations that are still flush with cash. With overall belt-tightening, there is also a consumer preference for lower-cost substitutes, which plays into the hands of discount retailers.
During a sluggish economy, investors want to focus on companies that either provide essentials or the best value for a consumer's dollar—and ideally a company that provides both. Depending on how long an economy remains sluggish, there can be several shakeouts at the higher end of the conspicuous consumption scale.
This downward pressure can offer an opportunity to short some higher-end brands, but a sluggish economy alone should not be the sole trade trigger. Many high-end brands have a global strategy that helps offset periods of sluggishness in any one market.
How Does the Federal Reserve Stimulate a Sluggish Economy?
During periods of sluggish economic growth, the federal reserve may try to stimulate the economy by lowering interest rates. This increases the circulation of money in the economy, thereby stimulating more economic activity. When the economy begins to overheat, the federal reserve may then take the opposite action, reducing the circulation of money in the economy.
What Are the Effects of a Sluggish Economy?
Although there is no formal definition for a sluggish economy, the term is often associated with falling consumption, low GDP growth, or rising unemployment. Due to a heightened sense of economic precarity, people may reduce their consumption and increase their savings. The reduced consumption thereby has a self-fulfilling effect, causing the economy as a whole to suffer.
What Causes a Weak Economy?
There are many potential reasons for a weakened economy, from domestic political factors to worldwide market conditions. Regardless of the proximate causes, high levels of unemployment, debt, or inflation can cause economic weakness by reducing consumers' discretionary spending.
The Bottom Line
A sluggish economy is a colloquial term for slow growth and disappointing economic conditions. Although it is frequently used in the media, the phrase has no formal definition. Instead, it serves as a metaphorical expression for gloomy economic sentiments.