An economic downturn implies a fall in real GDP. A downturn also includes that period just before a recession – with a fall in the rate of economic growth and a widening output gap.
A downturn will also include a period of negative economic growth and recession.
An economic downturn is part of the economic cycle (sometimes referred to as trade cycle or business cycle)
This shows two major economic downturns in the UK 1979-81 and 1990-91
The UK definition of a recession is – negative economic growth for two consecutive quarters.
Features of economic downturns
The definition of an economic downturn is less strict than a recession. For example, there may be a consensus we are in an economic downturn even with a small rate of positive economic growth. With very low economic growth, there is likely to be a negative output gap and lower living standards. For example, during 2010 – 2012, the UK economy was stagnating with economic growth of around 0%. In addition, inflation was relatively high, meaning many saw a fall in their real wages. But, this was considered an economic downturn
The key features of an economic downturn include:
- Negative or very low economic growth
- Rising unemployment
- Falling asset prices – shares and house prices
- Low confidence and falling investment. (the accelerator theory suggests that a fall in the rate of economic growth is enough to lead to lower unemployment)
- Rising spare capacity (negative output gap)
- Increasing government borrowing (due to higher government spending on benefits and lower tax revenue.
Usually, economic downturns are temporary and part of the economic cycle.
The UK has been experiencing a prolonged downturn since the start of 2008 when we first went into recession. There was only a temporary escape in 2010 when we had four quarters of positive economic growth. But, overall the picture of a stagnating economy and economic downturn.
It is easier to see the downturn from this graph showing real GDP growth compared to the trend rate.
The downturn shows that real GDP is growing by much less than potential. In fact, most people wouldn’t refer to this period as a downturn because it is much longer than the usual temporary downturn.
In the post-war period, we experienced quite a few downturns where the economy temporarily saw falling growth rates.
In the 1960s, these downturns still saw positive growth (although very low growth)