The economy is constantly changing, but it’s not easy to know exactly when it improves or deteriorates. We’ll explore the key factors determining economic growth and recession, examining the causes of business cycles and their impacts.
When is the economy good, and when is it bad?
Watching the news or looking around, the economy always seems tough. It’s rare to hear that the economy is good; instead, we often hear that it’s in crisis. But upon reflection, saying the economy is always in crisis isn’t accurate either. The term “crisis” fits when things have been good and then deteriorated significantly. So, when is the economy good, and when is it bad?
Focus on the economic growth rate!
There is actually a standard for judging this: GDP. GDP represents a nation’s economic strength, so a decline in GDP indicates a worsening economy. Of course, GDP is a national aggregate statistic, so even if your personal economic situation is poor, the national economy could be strong, or both could be poor. However, understanding GDP properly allows us to distinguish between two scenarios.
Let’s examine this in more detail. First, we must account for inflation. Since GDP calculates production by summing market values, if the price of an identical product doubles, GDP also doubles even if production volume remains unchanged. However, this distorts the true scale of the national economy. Therefore, we subtract the price increase portion and call the newly calculated GDP ‘real GDP’. This real GDP becomes the benchmark for assessing the economy’s health.
Many countries, including Korea, release quarterly statistics covering three months. Observing the movement of real GDP, it generally continues to rise. However, at certain points, it may rise more sharply, while at other times, the upward trend may slow, resulting in a smaller increase than usual or even a decrease. This real GDP allows us to calculate the annual or quarterly economic growth rate. This growth rate then serves as the benchmark for judging whether the economy is performing well or poorly. If the growth rate exceeds the usual level, the economy is considered strong; if it rises only slightly or declines compared to the norm, the economy is deemed weak.
A good economy means active production, leading to increased income, more robust consumption, higher employment, and easier job acquisition. Conversely, a poor economy means reduced production and income, shrinking consumption, lower employment, and harder job acquisition. In 2020, South Korea’s economic growth rate turned negative at -0.7% compared to the previous year, indicating a poor economic state at that time. As COVID-19 swept across the globe, other countries experienced even lower economic growth rates than Korea. In the fourth quarter of 2022 (October to December), the economy contracted by 0.4 percent compared to the previous quarter (July to September). While not on an annual basis, this indicates the economy was weak on a quarterly level.
Meanwhile, examining changes in the U.S. GDP per capita reveals relatively high growth rates, but also periodic downturns. For example, the economic recessions of the 1970s and 1980s caused by the oil shock, the economic crisis of the late 2000s triggered by the subprime mortgage crisis, and the COVID-19 shock of 2020 all correspond to official recessions.
What does it mean for the economy to deteriorate?
The deterioration of the economy can be further categorized. One is when it worsens slightly in the short term, and the other is when the long-term trend deteriorates. A short-term economic downturn occurs when conditions worsen beyond the trend over a decade or so, and the trend itself can continue to deteriorate. The long-term movement of GDP is difficult to judge because it manifests over several years or more, but comparing the GDP of various countries allows for some understanding. While some countries experience relatively sustained and significant GDP growth, others see slower GDP increases.
The issue concerning the long-term trend of GDP is called the ‘economic growth problem’, and the slowing of economic growth itself is termed the ‘low growth problem’. Conversely, short-term fluctuations in GDP are called the ‘business cycle problem’. When GDP temporarily declines due to a business cycle fluctuation, it is called a ‘recession’ or ‘economic downturn’. Officially, a recession refers to a situation where GDP declines for two or more consecutive quarters.
Recessions and the low-growth problem are related yet distinctly different. They differ in many ways, but particularly in their solutions. To resolve a recession, the standard approach is for the central bank to lower interest rates and for the government to increase spending through measures like supplementary budgets to stimulate a short-term economic rebound. In contrast, solving the low-growth problem requires numerous efforts: corporate investment, entrepreneurial innovation, improving the education system, investing in promising industries and science/technology, appropriate structural adjustments, international trade, and reducing inequality.
Since recessions are short-term problems, solutions tend to show effects relatively quickly. However, low growth is inherently a long-term problem, and solutions take longer to yield results. Particularly when low growth is severe, lowering interest rates or increasing government spending can be ineffective or even harmful to the economy, requiring caution.
What exactly is an economic crisis?
While definitions vary slightly, most agree that an economic crisis occurs when serious problems arise, such as Korea’s 1997 foreign exchange crisis or the 2007 U.S. subprime mortgage crisis. In any case, when a foreign exchange crisis or financial crisis occurs, the economy often deteriorates severely almost overnight, and if mishandled, it can even lead to national default.
To prevent this, the government must properly manage financial markets, efficiently operate foreign exchange reserves, and strive to maintain a high national credit rating. While the overall strength and growth of the national economy are also related to preventing economic crises, this is because, beyond issues of low growth or recession, the management of foreign exchange and financial systems is more closely linked.
Thus, low growth, recession, foreign exchange crises, and financial crises all involve a process where GDP declines or its upward trend is halted. However, upon closer examination, the short-term and long-term trends of GDP differ, as do the degrees of change. Most importantly, the backgrounds and causes of these problems vary, leading to differences in preventive measures and solutions. This is similar to how simply saying “I’m sick” makes it difficult to determine the appropriate treatment. While a decline in GDP is indeed like being sick, this alone makes it hard to find the precise cure. The low-growth problem is akin to having poor physical fitness or being overweight; it can be addressed by maintaining a balanced diet and exercising diligently. However, if there are various illnesses like the flu or hepatitis, the precise cause must be identified and treated accordingly. Currency crises or financial crises can be likened to emergencies like car accidents or strokes.
Therefore, overusing the term “economic crisis” is problematic. This word alone does not sufficiently provide answers on how to solve the problem or which countermeasures are crucial and should be prioritized. Furthermore, frequent use of this term in everyday conversation causes the public to perceive the phrase “economic crisis” as less serious. Consequently, when a truly urgent and massive crisis actually occurs, it becomes difficult to persuade the public and to rally their participation in overcoming the crisis.
