Economic depression vs recession: preparing for financial downturns

An economic depression is more severe and long-lasting than a recession, but both can wreak havoc on financial markets. Find out what the difference between a depression and recession is, and how you can prepare for a longer economic decline.

Economic depression vs recession

A depression and recession are both periods of economic contraction, the difference between the two is the duration and severity of the event.

A recession is typically defined by statistics agencies as two consecutive quarters of declining gross domestic product, normally lasting for a few months. Meanwhile, a depression is more extreme and lasts for years.

Learn more about how to trade a recession.

Depression vs recession: the difference in numbers

	The Great Recession	The Great Depression
Duration	2007 to 2009 (two years)	1929 to 1939 (10 years)
Unemployment	10.6%	24.9%
GDP	-4.3%	-30%

What is an economic depression?

An economic depression is an extreme decline in economic activity – usually lasting several years or even decades. Although, there’s no clear moment or threshold at which a recession becomes a depression.

There’s no strict definition of a depression, where economists say the unemployment rate hit X level or GDP growth hit X level. That’s because there’s only been one economic depression in recent history – the Great Depression that ran from 1929 to 1939 in the US.

How long do economic depressions last?

Economic depressions can last varying amounts of time – from years to decades. As there’s only been one depression in recent history there isn’t enough data to look at.

While some economists would say a depression only lasts as long as the decline in economic activity, others would say that the depression lasts until the economy returns to normal levels.

What causes an economic depression?

An economic depression has no single cause but is the culmination of falling consumer confidence and demand to the point that companies have to cut costs – which leads to rising unemployment.

In the case of the Great Depression, the decline started in 1929 in the form of a recession and stock market crash. The economy had already been trending downward for a year, which had left stocks overvalued – triggering a mass sell-off.

The stock market crash showed consumers their fears were justified – leading to even lower levels of confidence, spending and investing. A huge number of businesses and banks failed which increased unemployment. Then a severe drought known as the Dust Bowl hit and the economic rout continued for 10 years.

What happens to stocks in a depression?

In a depression, the stock market is one of the first places that feels the growing pressure of unemployment and low consumer confidence. As investors rush in to sell their positions in failing businesses, it forces share prices down lower and lower.

In the Great Depression, investors sold approximately 13 million shares in an event that became known as ‘Black Thursday’ on October 241929. The crash’s bottom wasn’t reached until July 9 1932, at which point the Dow had fallen by 89.2% in total – from 381.17 down to 41.22.

Very few companies survived the Great Depression, but it’s unsurprising that those that did fall into the ‘defensive stock’ category. Most were food companies, energy and utilities firms, manufacturers and retailers, who provided essential goods and services throughout the downturn.

Learn more about stock market crashes.

Surviving an economic depression

Surviving an economic depression all comes down to preparation. You can protect your existing positions with risk management measures, and any new positions entered should always be thoroughly researched.

One of the most common strategies in a downturn is diversification – making sure that all your trades aren’t in one industry, asset class or country.

But it’s also important to assess your overall capital allocation. Managing your account balance is important at any time when you trade on leverage, but in a depression, your risk appetite might have to change.

You can go long or short on financial markets with derivative products, enabling you to speculate on both rising and falling financial markets.

You can start by opening an account, or practise first in a risk-free demo account.

Is an economic depression coming?

It’s highly unlikely that an economic depression is coming. Although experts are warning of a recession in late 2022 and into 2023, it’s expected to be mild. Unlike the 2008 financial crisis and the Great Depression, financial institutions haven’t been as badly affected, so the damage could well be limited.

Get the most recent news and analysis.

StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Please ensure you fully understand the risks involved by reading our full risk warning.

FOREX.com is a trading name of StoneX Europe Limited, and FOREX.com/ie is a domain operated by StoneX Europe Ltd, a member of StoneX Group Inc. StoneX Europe Ltd, is a Cyprus Investment Firm (CIF) company registered to the Department of Registrar of Companies and Official Receiver with a Registration Number HE409708, and authorized and regulated by the Cyprus Securities & Exchange Commission (CySEC) under license number 400/21. StoneX Europe is a Member of the Investor Compensation Fund (ICF) and has its registered address at Nikokreontos 2, 5th Floor, 1066 Nicosia, Cyprus.

StoneX Europe Limited is registered with the German Federal Financial Supervisory Authority (BaFin). BaFin registration ID: 10160255

FOREX.com is a trademark of StoneX Europe Ltd, a member of StoneX Group Inc.

The statistical data and the awards received refer to the Global FOREX.com brand.

This website uses cookies to provide you with the very best experience and to know you better. By visiting our website with your browser set to allow cookies, you consent to our use of cookies as described in our Privacy Policy.

Through passporting, StoneX Europe is allowed to provide its services and products on a cross-border basis to the following European Economic Area ("EEA") states: Austria, Bulgaria, Croatia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.

Additionally, StoneX Europe Ltd is allowed to provide Investment and Ancillary Services to the following non-EU jurisdiction: Switzerland.

StoneX Europe Ltd products, services and information are not intended for residents other than the ones stated above.

Tied Agent Information: KQ Markets Europe Ltd with Company No. HE427857.
Address: Athalassas 62, Mezzanine, Strovolos, Nicosia Cyprus.
Services Provided: Reception and Transmission of Orders.
Commencement Date: 06/12/2022
Website: KQ Markets - CFD Trading | KQ Markets

We may pay inducements, such as commissions or fees, to affiliates or third-party introducers for referring clients to us. This is in line with regulatory guidelines and fully disclosed where applicable.

StoneX Europe Ltd may make third party material available on this website which may contain information included but not limited to the conditions of financial markets. The material is for information purposes only and does not contain, and should not be construed as containing, investment advice and/or investment recommendation and/or an investment research and/or an offer of or solicitation for any transactions in financial instruments; any decision to enter into a specific transaction shall be made by the client following an assessment by him/her of their situation. StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.