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. 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.
Notable Happenings
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.
