To determine where in the business cycle an economy is, you usually look at how high the so-called resource utilization is. Concretely, they try to determine how high GDP could be without the economy overheating for the sake of it. This is called potential GDP and it is calculated, among other things, based on demographic developments, as well as assumptions about how productivity and structural factors in the labor market will develop.
The potential GDP is not a maximum level but rather indicates an equilibrium position. The difference between actual GDP and potential GDP is called the GDP gap. When this is negative, the economy is in a recession and when it is positive, it is a boom. When actual GDP grows faster than potential GDP, the economy is said to be in an upswing.
If the GDP gap is negative and we are in a recession, production can increase without creating inflation. In fact, the factors of production – labor power and real capital – are then underutilized, which dampens the price trend.
In the diagram above, the Norwegian Economic Institute’s assessments of how the output gap has developed from 1981 onwards are reported. The 1990s crisis, the financial crisis of 2008-2009 and the corona pandemic are clearly marked as deep depressions.
The recession that the financial crisis brought with it lasted a full seven years. It started in 2008 and not until the second half of 2015 did the GDP gap turn positive again. After that, the economy improved until the corona crisis hit and more or less paralyzed the world economy during the first quarter of 2020. Then there was a recovery in 2021 in both Sweden and the rest of the world. The Norwegian Economic Institute estimates that the economy will fall back into recession in 2022, which is expected to last until 2026 when the GDP gap closes again.