What is Negative Growth?

What is Negative Growth?

Negative growth is a contraction in business sales or earnings. It is also used to refer to a contraction in a country’s economy, which is reflected in a decrease in its gross domestic product (GDP) during any quarter of a given year. Negative growth is typically expressed as a negative percentage rate.

Negative growth is a decline in a company’s sales or earnings, or a decrease in an economy’s GDP during any quarter.

Declining wage growth and a contraction of the money supply are characteristics of negative growth, and economists view negative growth as a sign of a possible recession or depression.

Negative Growth in Business

Negative growth can be identified in business by conducting horizontal analysis to identify year over year declines. A horizontal analysis involves contrasting financial results across several fiscal periods to illustrate a trend. Accurately identifying negative growth can be performed on a nominal basis or a proportionate basis.

Identifying negative nominal growth is achieved when comparing an account balance year over year. It is a useful metric to assess if a business is shrinking in terms of scale. For example, say a company’s property, plant, and equipment (PP&E) is declining year over year; it can be inferred that the company is selling off or disposing of its capital assets. Ultimately, it can imply a reduction in expected future cash flows to be generated from its productive assets.

Identifying proportionate negative growth is achieved by making financial statements common size. The financial statements can be made common size by dividing balance sheet accounts by total assets or by dividing income sheet accounts by total revenues.

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Negative Growth and the Economy

Recurring periods of negative growth are one of the most commonly used measures to determine whether an economy is experiencing a recession or depression. The Recession of 2008, or the Great Recession, is an example of a period of economic growth measured as more than two years of negative growth.

The Great Recession began in 2008 and continued into 2010. The GDP growth rate in 2008 was -0.1% and in 2009 it was -2.5%. The GDP growth rate bounced back to positive in 2010 with a rate of 2.6%. Although the announcement of negative growth strikes fear into investors and consumers, it is just one of many factors that contribute to a recession or depression.

Observing Negative Growth in the Industry Life Cycle

The industry life cycle is a theoretical framework used to analyze the maturity of an industry. The four stages of the industry life cycle are:

1. Start-up stage

The start-up stage is a period where industry players see rapid increasing growth. It is often difficult to identify the industry leaders, as all industry players experience substantial risk. Generally, the start-up stage is characterized by disruptive technology and offers the potential for large-scale growth.

2. Consolidation stage

The consolidation stage is a period of stable positive growth, where industry players begin to emerge. It is characterized by a few companies controlling a sizable amount of market share. Overall, industries at the consolidation stage grow faster than the economy.

3. Maturity stage

The maturity stage represents the period where industry players all offer similar value propositions, and competition is primarily driven on a price basis. It leads to reduced negative growth in profit margins for industry players.

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4. Relative decline stage

The relative decline stage shows an industry growing slower than the economy. At such a stage, it is common to see minimal or negative growth in market share and profitability.