What is negative growth?
Negative growth is a contraction in sales or corporate profits. It is also used to denote a contraction in a country’s economy, which results in a decrease in its gross domestic product (GDP) in any quarter of a given year. Negative growth is usually expressed as a negative percentage.
Understanding negative growth
Growth is one of the main means used by analysts to describe the performance of a company. Economists also use it to describe the state and performance of the economy. Positive growth means that the company is improving and should post higher profits, which should increase the share price. When an economy is growing, it is a sign of prosperity and expansion. Positive economic growth means an increase in money supply, economic output and productivity. The opposite of positive growth is negative growth, and this describes the performance of a business that experiences declining sales and profits. An economy with negative growth rates has falling wage growth and an overall contraction in money supply.
Negative growth rates and calculations for companies
Analysts use growth rates as a measure of performance. An analyst needs two numbers: the start value and the end value (or the most recent). Then the analyst subtracts the start value from the end value and divides the response by the start value. The formula is as follows: (end value) – (start value) / (start value).
For example, if you own a business whose sales drop from $ 1 million to $ 500,000 in one year, you can calculate the growth rate by entering the number in the formula. The answer is: ($ 500,000 – $ 1,000,000) / $ 1,000,000), or negative 0.5. Multiply the answer by 100 for the percentage growth rate, which is negative by 50%. In other words, the company experienced negative growth the previous year.
Negative economic growth rates
Recurring periods of negative growth are one of the most commonly used measures of whether an economy is in recession or depression. The 2008 recession, or the Great Recession, is an example of a period of economic growth measured over two months of negative growth. The Great Recession started in 2008 and continued into 2020. Although the announcement of negative growth scares investors and consumers, it is only one of the many contributing factors to a recession or depression.
Negative growth rates and the economic contraction are also marked by a fall in real income, an increase in unemployment, a drop in industrial production and a drop in wholesale or retail sales. In situations where negative growth occurs, the real value of wages increases and consumers may view the economy as stable or improving. Likewise, when an economy experiences both positive GDP growth and high inflation rates, people may think that the economy is in decline.