We will start by breaking down the terms to compare Stagflation vs Stagnation. Stagflation is a period of time when there is high inflation and high unemployment. Stagnation is a period of time when economic growth is slow or nonexistent. Stagflation is often caused by an increase in the cost of oil. Stagnation can be caused by several factors, including a decrease in consumer demand or an increase in taxes. Stagflation is often more difficult to solve than stagnation because it requires a combination of policies to reduce inflation and increase employment.
What is Stagnation?
Stagnation is a term that characterizes an economy that remains unchanged. The markets will remain the same or grow very slowly for a quarter. The economy will often also suffer from other economic conditions like high unemployment rates.
Stagnation can also refer to periods of growth under 2% or 3%. These margins are meager and cannot help to curb high unemployment and involuntary part-time employment. High-performing economies often remain productive because of their drive to help consumers maintain/improve their living conditions. With a growing population, the number of citizens eligible for employment will rise. As more people enter the workforce, there is a need for more jobs in the economy.
These new employees will also be required to produce more goods to satisfy the population’s needs. As time passes, inflation continues to erode the disposable income of workers in the economy. There is a debate amongst economists around the sustainability of consistent GDP growth. The opposite (Stagnation) indeed carries adverse economic effects. However, every economy is expected to slump at the end of a cycle.
Recessions happen to countries almost every ten years. A recession means the GDP of an economy is contracting. This economic state is different from a period of Stagnation where the economy barely grows or stays the same size.
Example of Stagnation
Japan’s Lost Decade is one of the most prominent examples of an economy facing Stagnation. Japan faced Stagnation from 1990 to 2000. Japan’s economy was performing very well during the 1980s. The country had become an economic powerhouse quickly; however, it stalled in the 1990s. At the time, Japan’s GDP was growing by over 1% a year. Many economists argue the collapses in equity and real estate valuations were one of the critical factors leading to the Stagnation.
What is a stagnant market?
A market that neither grows nor shrinks is considered stagnant. During this period, the growth rate of companies’ market values remains constant. It is often discouraging for investors to make money during this time. The securities investors choose to store value usually stay at the same level. This failure to change in price means the markets are not appreciating. The stock market needs gains to woo capital investors. There are a few reasons to invest when gains and stock, mutual fund, and ETF prices remain steady or fall because of Stagnation.
As the world faces globalization, international markets can likely provide competition for local markets. As local markets grow stagnant, consumers will look for value elsewhere. It can lead to a fierce battle between industries for customers. In a well-performing economy, businesses can provide value for their investors without stealing market share. In an underperforming economy, expansion is only possible by taking customers away from the competition.
What are the causes of Stagnation?
Cyclical Stagnation
This feature is the most common form of Stagnation. Economies often follow a regular growth cycle followed by down periods. When the markets go up, they will eventually come down. Economic highs cannot last forever. These periods of transition lead to Stagnation.
Economic Supply Shocks
When there is a significant supply shock event, the economy will respond. Economies often stagnate as consumers wait to see what happens before spending their money. Events such as war require economies to realign their priorities rapidly to accommodate the war. Any supply shocks experienced can cause Stagnation.
Structural issues
Difficulties in accessing structural finance can discourage investment in the economy. It is often a limiting factor for economic innovation and growth. When the Federal Reserve introduces regulations that aren’t conducive for start-ups, an economy can likely experience Stagnation.
How to fix a stagnant market?
Increased spending
Improving the money supply in the economy will put money in consumers’ pockets. Infrastructure projects require significant government investment, and this causes money to enter the economy. The money goes from the Federal Reserve to contracting businesses and raw materials producers. These businesses then redistribute the funds to consumers through employment packages. This compensation happens in the form of wages. As the country’s workforce generates better income, they can spend that money on other goods and services.
Business Friendly Regulations
Adapting the regulations or tax codes to encourage economic growth. Legislators often introduce tax breaks for consumers adding capital to the economy. New or small businesses help keep money in local economies distributed within different sectors of the economy.
What is the difference between Stagnation and Stagflation?
- Stagflation is an economic period that is characterized by high levels of inflation and unemployment. Stagnation can occur during economic Stagflation; however, when an economy is not growing, it doesn’t mean there is Stagflation.
- Stagflation is a worse economic state than Stagnation. This period brings a lack of growth, high unemployment, and less disposable income for consumers. Stagnation often doesn’t result in expensive goods in the economy.
- Economies often take longer to recover from Stagflation than they do from Stagnation. It is typically more painful to escape. During times of Stagflation, governments have to avoid increasing their spending. Increased government spending is a method often used to spur economic growth. It works well to handle secular Stagnation, but during times of Stagflation, it will likely increase inflation. The measures that can help take an economy out of Stagnation will worsen during Stagflation and vice versa. Conversely, if the government increases the interest rates in the country and reduces its spending, it can cause the economy to stagnate.
FAQ
What Causes Stagflation?
Stagflation is often the result of an increased money supply. It happens because of poorly executed economic policy or supply shocks.
Why Is Stagflation Bad?
Stagflation causes a decrease in consumer spending power. Decreased disposable income leads to runaway inflation. During runaway inflation, there is less money to spend, and the cash value declines.
Conclusion | Stagflation vs Stagnation
Stagflation can be preferable to stagnation in some circumstances. For example, stagflation can spur economic growth by increasing government spending if an economy is not growing and unemployment is high. Stagflation can also encourage businesses to invest in new or small businesses, which can help keep money in local economies distributed within different sectors of the economy.
