Sluggish Economy

What Is a Sluggish Economy?

A sluggish economy is an economy in which growth is slow to negligible in macroeconomic terms. The term is an analogy to familiar species of nonshell-bearing terrestrial gastropods, commonly known as slugs, which move very slowly. The description, sluggish, can refer to the economy as a whole or a component market or industry of the economy, such as sluggish housing starts.

Understanding a Sluggish Economy

The term sluggish economy is a colloquial phrase frequently used in financial and business media, with no exact, quantitative definition. It is a zoological comparison to the animals known as slugs, which move very slowly, in some cases traveling at an average speed of only 0.000023 meters per second. Like a slug, a sluggish economy is moving ahead, but very slowly, possibly so slowly as to be imperceptible. Though a sluggish economy may be used to mean slow or zero economic growth, it is not generally used to refer to negative growth or outright contraction in an economy, since slugs are physically incapable of moving backward. Note, however, that a sluggish economy is just an analogy and does not necessarily involve actual slugs.

You may, for example, see a headline like, "Economy Sluggish Due to Rising Oil Prices." Although the world economies are linked to global commodities and finance in different ways, there have been many cases of a sluggish global economy affecting all countries and most sectors. In a sluggish global economy, many countries can still experience positive growth, but the overall slow pace is still considered a sign of sluggishness. Both during and after the Great Recession, for example, a sluggish American economy had a negative effect on the global economy. This is to be expected as the U.S. was still the world's largest economy and a vital source of trade and investment for much of the rest of the world.

Short periods of sluggish economic growth may occur at the peak of a business cycle, when the economy is transitioning from a period of more rapid growth into a recession, so a sluggish economy is often considered a leading indicator of a potentially steeper downturn. Extended periods of sluggishness can occur after a recession if the subsequent economic recovery is held up by poor economic policy or for some other reason. A sluggish economy may also occur as a persistent condition resulting from underlying structural issues that constrain economic growth, such as an aging population; the dominance of mature, low-growth industries; or the presence of predatory local elites and government policies that discourage growth.

Debt collection, mediation, and job search services are examples of businesses that are likely to see demand increase when an economy is in the doldrums.

Good Businesses in a Sluggish Economy

When the economy is sluggish, it is generally harmful for a business since consumers and other businesses are less likely to purchase its products. A sluggish economy also has a negative effect on the labor market as businesses are less willing to hire more staff in times of weak economic growth.

However, a sluggish economy can actually be ideal for certain businesses and sectors. Businesses that see demand go up in weak economic conditions include debt collection, mediation, and job search services. Recession-resistant sectors like healthcare also benefit as a sluggish economy keeps costs low, with more businesses and individuals competing aggressively for the spending dollars of organizations that are still flush with cash. With overall belt-tightening, there is also a consumer preference for lower-cost substitutes, which plays into the hands of discount retailers like Walmart.

During a sluggish economy, investors want to focus on companies that either provide essentials or the best value for a consumer's dollar — and ideally a company that provides both. Depending on how long an economy remains sluggish, there can be several shakeouts at the higher end of the conspicuous consumption scale. This downward pressure can offer an opportunity to short some higher-end brands, but a sluggish economy alone should not be the sole trade trigger. Many high-end brands have a global strategy that helps offset periods of sluggishness in any one market.