Economic stagnation, which is sometimes called economic immobilism, occurs when an economy goes through a period of slow growth. Opinions about what constitutes slow growth vary, but most economists apply the term stagnation to any extended period during which gross domestic product rises by less than 2 or 3 percent. In capitalist nations, growth is seen as a crucial component of a healthy economy.
Economic stagnation often begins when the supply of goods outstrips consumer demand. During a recession, many companies begin to layoff workers, leading to less overall disposable income and a reduction in consumer spending. Before manufacturers have a chance to slow down production, a surplus of inventory quickly builds up, leading to an imbalance between supply and demand. Economic stagnation begins when companies slow down production and wait for existing supplies of inventory to be depleted before producing more goods.
Countries can also experience economic stagnation as a result of economic booms if consumers save a large percentage of their disposable income. In such situations, people save excess funds during the boom years, causing consumers to have more than enough money to buy the goods that they need and leading to a temporary spike in consumption. Thereafter, consumption drops and consumers with large stockpiles of cash have little incentive to work more, so production slows down and the gross domestic product of the nation begins to drop.
Governments can use a variety of different tools to try and address economic stagnation that range from increasing unemployment benefits to printing more money. Recipients of unemployment benefits are able to spend more than those who receive no such funds, and their expenditure can help to address the imbalance between supply and demand. Governments have to raise taxes to cover the cost of increased welfare expenses, and this means that other consumers experience a drop in income due to increase taxation. Taxpayers have to reduce their spending to account for their increased tax burden, and their reduced spending causes the economy to stagnate once again.
Some governments try to encourage consumer consumption by printing more money and lowering interest rates. These actions can stimulate the economy in the short-term, but in the long-term the excess cash in the economy can lead to inflation. As prices rise, consumers have less money to spend and before long supply starts to outstrip demand, and the nation enters another period of economic stagnation. Despite the efforts of economists and politicians to battle stagnation, economic downturns tend to be cyclical.
