What’s the difference between a recession, a depression and a cost of living crisis?
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Recession = two consecutive quarters of Gross Domestic Product (GDP) reduction, which generally means an economic slowdown, less trade and a decrease in economic activity. GDP = the total of all goods and services produced by an economy.
Depression = significant/severe drop in GDP that generally lasts for a year or more, typically includes widespread job losses and a severe/prolonged drop in economic activity
COL crisis = a period of rapidly rising prices for day-to-day/essential items (housing, food, basic transportation, etc.) – COL crises can occur even when the economy is strong (i.e., not in a recession or depression)
A recession is a sustained fall in economic activity. In other words, less stuff is being done, less money is moving around the economy. For regular people it almost always means falling incomes or increasing unemployment.
Technically it’s normally defined as two consecutive quarters of negative economic growth – so if the economy shrinks for two quarters in a row.
A depression is basically an even longer period of economic problems. It doesn’t have the same technical definition, but an economy that shrinks or shrinks and fails to grow again for, say, a year or so is likely to be regarded as in a depression.
A cost of living crisis is a bit difference. I’m not sure the origin of the phrase; I can only recall it being used in recent years in the UK, but it probably goes back further. It’s more used as a political term than one that comes out of academic economics or history.
“Cost of living” refers to the prices of everyday things for consumers – for regular people. Its change is measured by the inflation rate. Although sometimes people talking about a cost of living crisis will focus on costs that hit the less well-off more: eg. they pay more attention to the costs of basic food and housing and less to flights and hotels.
A cost of living crisis is when those prices rise much faster than people’s incomes, and people struggle to afford the things they’re used to – or even to afford the basics of a decent life.
This can happen without some of the features of a recession. The economy might grow while prices rise rapidly and incomes stagnate. Unemployment could go up a lot without a rise in prices or a fall in incomes for those still in work. In the UK we’ve technically avoided a recession, but for many people their standard of living has got worse because prices have gone up faster than their income.
Cost of Living crisis is happening because inflation is much higher than wages so people are getting poorer in real terms as their spending money can’t buy as much stuff (and if rents are accelerating as well, for example, they have less to spend anyway). This is happening despite most global economies growing.
A recession is defined (certainly in the UK) as two consecutive quarters of negative growth (i.e. the economy shrinking for two straight quarters of the year).
Depression and recession are often used interchangeably but a depression would probably be considered as a longer or harsher period of contraction.
A recession means only the poor are hurting…
A depression means the poor and the middle class are hurting…
A cost of living crisis means *everyone* is hurting! ^*
*except the ultra rich one percenters.
Think of the total amount of ‘stuff’ produced in a year in your entire country. This comprises physical goods from factories and farms, but also services such as legal work and entertainment.
The general trend since the Industrial Revolution (300 years) is that this total amount of stuff produced each year is increasing. An increase of 2-3% per year has been typical in the developed world for the last century.
Occasionally, the total amount of stuff produced goes down slightly. (Maybe by a couple of percent). When this happens it is called a recession. Typically these might happen about 1 year in every ten. So the economy kind of takes 9 steps forward then 1 back. Some people may argue about the frequency of recessions but it’s really not important for this explanation.
A particularly large recession, such as the big one in the 1930s is called a depression. There’s no fixed rule for how big a recession needs to be to be called a depression. Some people called the 2008-9 recession a depression. Some people call the current situation a depression.
Inflation is a measurement of the average amount that prices go up each year. Over the last few decades in the developed world, annual increases of around 2% have been typical. At the moment inflation is higher, it varies by country but in the UK where I am it has exceeded 10% over the last couple of years.
The “Cost of Living Crisis” is really a term made up by the media to describe the current state of affairs where the high inflation has caused many people difficulties in buying necessary goods. There’s no fixed definition for how high inflation needs to be for it to constitute a crisis, it’s subjective.
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