Economic Management in Stagnation and Recession

One difference between the current situation in the Russian economy and the previous recession (2008-2009) is the significantly lower monthly average rate of contraction. During the last recession, the Real Production Index declined by an average of 1.5% every month, while currently it is declining by an average of 0.2% every month.

As a result of economic globalization, more and more countries have become involved in the oscillation of macroeconomic conditions, requiring anti-crisis government management to ensure the stability of economic and financial systems. The effectiveness of crisis management depends on the ability of authorities to correctly identify the causes of the economic downturn.

The Ministry of Economic Development (MED) of the Russian Federation has downgraded its forecasts for 2013 as well as for 2014-2015 for the fourth time in a year. The GDP growth forecast for 2013 was lowered from 1.8% to 1.4%, while the forecasts for 2014 and 2015 were lowered from 3% to 2.5% and from 3.1% to 2.8%, respectively. [1]

MED also lowered its forecast of real wage growth in 2013-2014 in Russia. In addition to the inertial "bad" scenario, MED has simulated "Version A" which is even worse and would result from deteriorating external economic conditions: if the Eurozone recession spreads, global GDP growth slows to 2.4%, and oil prices fall to $100 per barrel.

Thus, the economic situation in Russia in 2013 has not been the best. GDP did not grow, the ruble declined, and investments fell. Analysts from HSBC write: "The Rosstat data for the second quarter of 2013 indicate that the economy went into recession in the first half of the year." [2]

In economics, the term "recession" means a relatively moderate drop in production or slowdown in economic activity. The decline in production is characterized by zero or declining GDP growth for over six months.

Recession is one of the phases of the economic cycle that follows boom and precedes depression. However, society became too sensitive to the term "depression" after the most famous depression, the Great Depression, which began in the United States in 1929 and spread to other countries of the world. After the crash of 1929, economists and politicians decided to exclude the word "depression" from use, initially favoring "recession" to indicate a serious economic decline, before switching to terms like "slowdown", "drop", "deviation", etc.

Murray Rothbard, an American economist, wrote as early in 1969 that recession, depression, drop or slowdown are just different names for the same thing, and that people choose what to call it based on ideology. However, in the modern economy they are still treated as different concepts. For example, the term recession currently means that the main economic indicators decline for two straight quarters. In other words, recession is when the economy is contracting, which currently is not happening in Russia. In mid-2013, Mr. Ulyukayev, head of MED, said that there is no recession in the Russian economy and never will be. He noted that the term "stagnation" is a better description of the Russian economy.

Stagnation is a period long-term economic slack characterized by low (or zero) GDP growth rates, high unemployment, and declining living standards. In a period of stagnation, the structure of the economy remains unchanged, and the economy does not foster innovation.

There are no exact numerical values characterizing stagnation, but traditionally GDP growth of less than 2-3% per year over several years is the kind of low growth indicative of stagnation.

One difference between the current situation in the Russian economy and the previous recession (2008-2009) is the significantly lower monthly average rate of contraction. During the last recession, the Real Production Index declined by an average of 1.5% every month, while currently it is declining by an average of 0.2% every month.

What makes the current situation exceptional is that the decline is occurring at a time when the federal budget is receiving substantial revenues from oil and gas exports.

In accordance with the methodology accepted by the National Bureau of Economic Research (NBER), the month before a crisis, in which manufacturing reaches a peak is considered the beginning of a recession. Russia saw a peak of this kind in November 2011, and this recession lasted over 10 months. [3]

Experts are convinced that if the government of the Russian Federation does not take urgent measures to stabilize the situation, the consequences will be severe. In the US and the UK, it is assumed that, from a technical perspective, recession is six consecutive months of economic decline. Stagnation is harder to diagnose: it does not have an exact numerical expression and a recognized time horizon.

But there is an important difference between recession and stagnation. Recession means that the economy is adapting to the new reality by compressing certain activities and is seeking a new basis for the future development by trial and error. Such adaptation does not occur in a prolonged period of stagnation, and there is little hope on the horizon for any growth. This must be taken into account in the government response to the economic crisis.

[1] http://www.newsfiber.com/p/s/h?v=E7JxgUZFg9yA%3D+aGXXinb%2Brgg%3D
[2] http://www.vedomosti.ru/finance/news/19673031/ne-v-stavkah-delo
[3] http://aillarionov.livejournal.com/452369.html

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