# Economic Stagnation Explained: Definition, Causes, and Real-World Examples

![A group of sad employees carry cardboard boxes filled with their office belongings after being laid off due to economy stagnation. ](https://www.investopedia.com/thmb/_MSs5Ugk6sOutaWO0jR9drgp9Sw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/StagnationDefinitionHowItWorksandExample-3fbda07a5885443d8ae63d626efa457a.jpg)

*— skynesher / Getty Images*

## What Is Stagnation?

Economic stagnation is a period characterized by slow or no growth, often with high unemployment, affecting both macroeconomic scales and specific sectors. Typically marked by a [GDP](https://www.investopedia.com/terms/g/gdp.asp) growth rate of less than 2-3%, stagnation can result from economic cycles, shocks, or structural issues within an economy. Understanding this phenomenon is crucial for identifying its causes, associated risks, and possible policy measures to mitigate its impact.

### Key Takeaways

*   Stagnation refers to a lengthy period of minimal or no economic growth, typically quantified as less than 2-3% annual GDP growth, often paired with high unemployment.
*   It can occur due to temporary economic shocks, cyclical conditions, or longer-term structural issues within an economy.
*   Governments can combat stagnation by increasing spending, cutting taxes, and lowering interest rates to stimulate economic growth.
*   Stagnation can affect various elements of the economy, including increased unemployment rates, stagnant wages, and subdued stock market performance.
*   Understanding the difference between stagnation, stagflation, and recession is crucial for identifying distinct economic conditions and their implications.

## How Stagnation Affects Economic Growth 

Stagnation occurs within an economy when total output is either declining, flat, or growing slowly. High unemployment, flat job growth, stagnant wages, and no stock market [booms](https://www.investopedia.com/terms/b/boom.asp) indicate stagnation. As economies cycle through periods of [recession](https://www.investopedia.com/terms/r/recession.asp) to growth or from growth to recession, they may experience a time of stagnation.

### Recognizing Cyclical Stagnation in Economic Cycles

Stagnation can occur as a temporary condition in the course of an [economic cycle](https://www.investopedia.com/terms/e/economic-cycle.asp) or [business](https://www.investopedia.com/terms/b/businesscycle.asp) cycle as a recession is ending and recovery is beginning. During these times, [monetary](https://www.investopedia.com/terms/m/monetarypolicy.asp) and [fiscal policies](https://www.investopedia.com/terms/f/fiscalpolicy.asp) may be applied to prevent lasting stagnation.

### How Economic Shocks Lead to Stagnation

Specific events or economic shocks can induce periods of stagnation which may be short-lived or have lasting effects, depending on the specific events and the resilience of the economy.

War, famine, rising oil prices, or a drop in export demand can cause stagnation.

### Understanding Structural Stagnation and Its Impact 

A stagnant economy can result from longer-term, structural conditions in a society. Mature economies are characterized by slower population growth, stable economic institutions, and slower growth rates. Classical economists refer to this type of stagnation as a stationary state, and [Keynesian economists](https://www.investopedia.com/terms/k/keynesianeconomics.asp) consider it common in an advanced economy.

Institutional factors, such as entrenched power among incumbent special interest groups who oppose competition and openness, can induce economic stagnation. Western Europe experienced this type of economic stagnation during the 1970s and 1980s, dubbed [Eurosclerosis](https://www.investopedia.com/terms/e/eurosclerosis.asp).

Stagnation can affect [emerging economies](https://www.investopedia.com/terms/e/emergingmarketeconomy.asp) with outdated political or economic systems and growth-discouraging policies.

## Strategies to Overcome Economic Stagnation 

Governments commonly implement a monetary policy or fiscal policy that spurs economic growth using tools such as:

### Increasing Government Spending

Government infrastructure investment boosts new business projects and creates jobs. Higher wages lead to more spending and increased demand for goods and services, boosting economic growth.

### Decreasing Taxes and Regulation

Lower taxes and regulations help businesses retain capital for investment and innovation, boosting growth.

### Lowering Interest Rates

Lower interest rates make saving less appealing, leading people to spend or invest more.

## Comparing Stagnation, Stagflation, and Recession

As economies transition between growth and decline, they may face stagnation, stagflation, or recession.

*   Stagnation is a prolonged period of slow economic growth as measured by gross domestic product (GDP) and may be accompanied by high unemployment.
*   [Stagflation](https://www.investopedia.com/terms/s/stagflation.asp) is a slow economic cycle that includes high [inflation](https://www.investopedia.com/terms/i/inflation.asp) as well as high unemployment.
*   A recession is a significant and prolonged downturn in economic activity usually measured by two consecutive quarters of negative gross domestic product (GDP).

## Real-World Example of Stagnation

The [Great Recession](https://www.investopedia.com/terms/g/great-recession.asp), which began in 2008, kicked off a long period of economic stagnation, followed by a slow expansion from 2009 until the COVID-19 pandemic in 2020. GDP growth averaged 2.3% during this time. During the aftermath and recovery of the Great Recession, the Federal Reserve's monetary policy included [quantitative easing](https://www.investopedia.com/terms/q/quantitative-easing.asp) to help the United States spur the stalled economy.  

## What Is the Average GDP During Periods of Stagnation?

Stagnation is a period of slow growth in an economy, characterized by a GDP under 2% or 3%.

## How Are Investors Affected by Stagnation?

During a period of stagnation, the stock market sees fewer gains, and stock, mutual fund, and ETF prices often hold steady or fall slightly during stagnation.

## How Are Workers Affected by Stagnation?

Stagnation is evident with higher unemployment and falling wages, making it difficult for individual workers to compete for jobs and wages.

## The Bottom Line

Stagnation represents a long phase of minimal economic growth, with GDP rising less than 2-3% annually. This economic slowdown can stem from cyclical downturns, unexpected economic shocks, or structural issues within an economy. During stagnation, high unemployment and stagnant wages prevail. Governments strive to reinvigorate growth through monetary and fiscal strategies, such as increasing infrastructure spending, reducing taxes, and lowering interest rates to stimulate economic activity and prevent prolonged stagnation.  

> **Article Sources**
>
> 1.  Center on Budget and Policy Priorities. "[Chart Book: Tracking the Post-Great Recession Economy](https://www.cbpp.org/research/economy/tracking-the-post-great-recession-economy)."