Stagnation: Definition, How It Works, and Example

What Is Stagnation?

Stagnation is a prolonged period of little or no growth in an economy. Real economic growth of less than 2% annually is considered stagnation, and it is highlighted by periods of high unemployment and involuntary part-time employment. Stagnation can occur on a macroeconomic scale or a smaller scale in specific industries or companies. Stagnation can occur as a temporary condition, such as a growth recession or temporary economic shock, or as part of a long-term structural condition of the economy.

Key Takeaways

  • Stagnation is a condition of slow or flat growth in an economy.
  • Stagnation often involves substantial unemployment and under employment, as well as an economy that is generally performing below its potential.
  • Periods of stagnation can be short lived or long lasting, and can result a range of economic and social factors.

Understanding Stagnation

Stagnation is a situation that occurs within an economy when total output is either declining, flat, or growing slowly. Persistent unemployment is also a characteristic of a stagnant economy. Stagnation results in flat job growth, no wage increases, and an absence of stock market booms or highs. Economic stagnation can occur due to a number of causes.

Cyclical Stagnation

Stagnation sometimes occurs as a temporary condition in the course of an economic cycle or business cycle. This could happen as a growth recession or a stalled recovery from a full recession. In late 2012, during the aftermath of the Great Recession, supporters of the Federal Reserve's monetary policy considered the third round of quantitative easing necessary to help the United States avoid economic stagnation. This type of stagnation is cyclical and temporary.

Economic Shocks

Specific events or economic shocks can also induce periods of stagnation. These may be very short lived or have lasting effects, depending on the specific events and the resilience of the economy. War and famine, for example, can be external factors that cause stagnation. A sudden increase in oil prices or fall in demand for a key export could also induce a period of stagnation for an economy. However, some economists, who favor Real Business Cycle Theory, would consider such periods essentially the same as cyclical stagnation. 

Structural Stagnation

A stagnant economy can also result from longer-term, structural conditions in a society. When stagnation occurs in a stable economy, it can be much more permanent than when it results from economic shocks or in the course of a normal business cycle.

Stagnation can happen in an advanced economy with economic maturity. Mature economies are characterized by slower population growth, stable economic institutions, and slower growth rates. Classical economists refer to this type of stagnation as a stationary state, and Keynesian economists consider it the secular stagnation of an advanced economy. Institutional factors, such as entrenched power among incumbent special interest groups who oppose competition and openness, can induce economic stagnation. For example, Western Europe experienced this type of economic stagnation during the 1970s and 1980s, dubbed Eurosclerosis.

Conversely, stagnation can afflict underdeveloped or emerging economies. In these economies, stagnation persists due to the lack of change in political or economic institutions where there is no incentive to adapt and grow. Additionally, emerging or underdeveloped economies may get stuck in a static equilibrium due to economic or institutional factors, such as a resource curse or predatory behavior by local elites.

Cultural and population characteristics can also contribute to economic stagnation. A low-trust culture can handicap economic performance by discouraging adherence to contracts and property-rights. A population with (on average) lower conscientiousness, lower general cognitive ability, or high rates of endemic, debilitating disease can experience slower economic growth as a result.

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