Stagnation in the economy is a period of no or slow growth and no decline. Wages, profits, and prices stay flat, removing many of the incentives that make an economy hum. Stagnation often occurs as the economy recovers from a shock, which makes the lack of growth especially painful. One of the causes is that people often save money after an economic crisis rather than invest it.
Definition and Example of Stagnation
A stagnant economy is an economy experiencing very little growth or no growth at all. In a stagnant economy, nothing much changes except that individuals save money because they are nervous about the future. Several integral parts of the economy stay flat, including wages and profits.
Under stagnation, GDP growth is anemic. Unemployment is stable but remains at relatively high levels. Business owners are reluctant to expand because they don’t know if they will be able to make money from it. Consumers are reluctant to spend money on houses, cars, or appliances because they don’t know if they will be able to keep their jobs. The economy stands still.
- Alternate name: Secular stagnation
Japan experienced a stagnation that lasted throughout the 1990s, a period known as “The Lost Decade.” Japanese financial markets collapsed in the early '90s, and it took Japan more than a decade of stagnation for the country to experience economic expansion.
How Stagnation Works
When stagnation occurs, the economy is not getting better or it’s taking the slow route to recovery. In large part, it is because there is more money saved in the economy than there are investment opportunities. The lack of investment opportunities is due to concerns about the future, coupled with expected declines in population growth and a shortage of new ideas. A financial shock, such as the 2008 financial crisis, often creates the uncertainty that causes stagnation.
The primary characteristics of secular stagnation include increased savings, a decline in population growth, the lack of good investment opportunities, and a drop in the relative price of investment goods that contributes to increased savings rates. These combine to create a flat economy with little growth and little new opportunity.
Countries facing stagnation aren’t able to consistently hit their target inflation rates.
One of the hallmarks of stagnation is a lack of investment, and one way to address that is through fiscal measures such as government-spending projects. However, that only works if a nation’s lawmakers agree that stagnation is a problem that can be fixed. The economic policies that address stagnation can take a long time to take effect, too, dragging out the time the economy spends in the doldrums.
What It Means for Individual Investors
The increase in savings that characterizes a period of stagnation drives down interest rates, hurting returns for savers and holders of government bonds. Investors tend to seek out riskier, non-government investments to get a meaningful return on capital, or they choose to take less risk and accept the lower yields. Stagnation periods tend to be difficult for everyone.
Between December 2008 and December 2015, the federal funds rate was below 0.20 each month, the lowest rate since 1955 and a sign of stagnation.
The Great Recession, which began in 2008, kicked off a long period of economic stagnation. It was followed by an era of long but slow expansion from 2009 until the pandemic began in 2020. GDP growth averaged 2.3% during this period, and it took seven years for the unemployment rate to return to where it was before 2008. Further, private domestic investment slowed from 2008 to 2015, increasing by less than 0.1%, whereas it jumped around 0.3% from 1995 to 2000.
- Stagnation is a period of no or little economic growth, or change in unemployment.
- A hallmark of stagnation is a lack of investment, either because people are nervous about the future or because they see few investment opportunities because of slow population growth and a lack of new technological innovations.
- One cause of stagnation is excess savings because of fear and a lack of investment opportunities, so savers and investors will see very low interest rates.