What it means
Economists measure growth by the change in gross domestic product, or GDP, which is the total value of goods and services produced in a country. When growth stays well below its long-run trend for an extended period, commentators call the economy sluggish.
There is no official threshold, so the label is a judgement and not a statistic. The symptoms are familiar.
Unemployment edges up or stops falling, wages grow slowly, consumers hold back on big purchases, and companies delay hiring and expansion. Prices may also rise more slowly because there is little pressure on demand.
For a business, a sluggish economy changes the planning assumptions. Revenue growth that came easily in good years must now be won from competitors, customers take longer to pay, and credit becomes harder to obtain.
Cost control and cash discipline move higher up the agenda. Central banks and governments respond with policy.
A central bank might lower interest rates to encourage borrowing and spending, while a government might cut taxes or increase public spending. These tools take time to work, so a sluggish period can last for years if the underlying causes are structural, such as an ageing population or low productivity.
A nuance for finance professionals is that real growth must be compared with population and inflation. Growth of 1% in a country whose population is growing faster than 1% means output per person is falling.
Analysts therefore look at real (inflation-adjusted) GDP and at GDP per person before drawing conclusions about living standards. The label also depends on the audience.
A growth rate that feels sluggish in a fast-developing economy might be considered perfectly healthy in a mature one, so comparisons should be made against the country's own history and potential.
In practice
Real-world examples.
Example
A furniture manufacturer sees demand flat for the third year running as households delay major purchases. Its finance director rebuilds the budget around zero volume growth and focuses on cutting waste. The company protects its margins even though sales do not rise.
Example
A commercial bank notices that business loan applications have slowed and that more borrowers ask to extend repayment terms. Its credit committee tightens lending standards for cyclical industries. It also raises its provisions for loans that might go bad, which reduces profit in the current year but protects the bank if defaults rise.
Example
A technology start-up that planned to double its customer count every year finds that new clients take far longer to sign. Its chief executive extends the cash runway (the time before money runs out) by delaying two hires. The company chooses steady growth over a risky funding round, and the board agrees that surviving the slow period matters more than hitting the original target.
Formula
Calculation
Real GDP growth rate = (Real GDP this year - Real GDP last year) / Real GDP last year x 100
Suppose an economy produced real output of $500,000,000,000 last year and $505,000,000,000 this year. The change is 505,000,000,000 - 500,000,000,000 = $5,000,000,000. Growth = 5,000,000,000 / 500,000,000,000 = 0.01, or 1.0%. If the population grew by 1.5% over the same period, output per person fell by roughly half a percentage point despite the economy growing.Case study
Seen in the real world.
Cedarwood Machinery is an illustrative, fictional maker of industrial equipment. After several years of weak national growth, its order book stagnated and its customers began to pay more slowly.
The chief financial officer cut discretionary spending, negotiated longer payment terms with suppliers and offered customers a small discount for early payment. She also ran a scenario in which sales stayed flat for two more years and confirmed the business could still meet its loan repayments.
The illustrative lesson is that a sluggish economy rewards preparation. Cedarwood did not grow quickly, but it avoided a cash crunch and was ready to take advantage when demand picked up. Its customers remembered that the company had stayed reliable through the quiet years.
Watch out
Common mistakes.
- Treating a sluggish economy as a recession, when output is still growing, just too slowly to create strong job and income gains.
- Looking only at total GDP and ignoring population growth, which can hide a fall in output per person.
- Budgeting on last decade's growth rates, which leads to targets that the market cannot support.
Questions
People also ask.
What growth rate counts as sluggish?
There is no official figure, but it generally means growth well below the economy's long-run trend.
Can inflation be high in a sluggish economy?
Yes, that combination is called stagflation and is particularly hard for policymakers to treat.
What should a business do first?
Protect cash by tightening credit control, reviewing costs and testing the budget against a flat-sales scenario.
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