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.

BREAKING DOWN 'Stagnation'

In late 2012, for example, supporters of the Federal Reserve's monetary policy considered the third round of quantitative easing 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 slightly. Consistent unemployment is also a characteristic of a stagnant economy. However, stagnation does not constitute a recession. Instead, stagnation results in flat job growth, no wage increases and an absence of market booms or highs. This is different from a recession, where all three of these factors exhibit a steep decline.

Stagnation sometimes occurs naturally, for example, when the economic cycle is in a downward trend. Stagnation can also occur unnaturally, for example, when a catastrophic event causes economic certainty but not necessarily a recession.

Situations Where Stagnation Arises

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

Conversely, stagnation can afflict underdeveloped or emerging economies. In these economies, 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.

In these last two cases, stagnation arises due to external or internal forces that are not necessarily economic factors. War and famine, for example, can be external factors that cause stagnation. In addition, 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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