Depression vs. Recession

Both recession and depression are phases of the regular economic cycle, and refer to the process of worsening or a poor economic condition.

Recession is the term which signifies the economic downturn, which appears just after the phase of prosperity in the economic cycle. It is agreed, that the recession appears, when GDP declines for at least two consecutive quarters. The reason for that is the overproduction and decrease of demand.

During a recession, the economic activity and the most of the economic indicators decline like rate of employment, investments, corporate profits or tax contributions.

The recession is also characterized with increasing rate of unemployment, numerous bankruptcies, shrinking trade activity and commerce, as well as highly volatile currency value fluctuations.

Depression is the economic phase which appears after the recession. There is no agreed definition of a depression. Sometimes it is defined as more severe, long lasting recession during which the economic indicators continue to deteriorate. So, according to this definition, the rate of unemployment rapidly increases while investments and production output significantly shrink. Consequently, depression is dynamic and a long phase.

Sometimes, depression is defined as a stable phase, where economic activity stopped to contract and all economic indicators reached their bottom level. So the employment rate, investments and production output stop decreasing.

During this phase, the market finished "cleaning", where all weak companies have been shut down, inefficiencies have been eliminated and the use of resources adjusted. According to this definition, depression is stable an a quite short phase, because the strongest and most efficient companies survived and economic is "ready" to grow again.

So in summary:

During a recession and depression the economic activity gets worse or achieve its bottom level. Both phases appear just after the phase of prosperity and just before the phase of growth in the economic cycle.