Economic (trade/business) cycles 2.5.3

What is an economic cycle?

Refers to the fluctuation of economic activity in an economy over time.

What are key factors that characterise economic cycles?

• Rapid expansion (boom)

• Slowdown

• Peak

• Recession

• Trough

• Economic recovery

What is a recession?

A period of at least 6 months when an economy suffers a fall in aggregate output, employment, investment and business/consumer confidence

When does economic booms happen?

When actual growth of real GDP is well above a country’s trend growth rate

When does an economic slowdown happen?

When the pace of growth drops

What could be a cause of economic slowdown?

• Central banks might respond to an increasing in inflation by raising interest rates, which can slow down consumer spending and business investment

• A slowdown in global economic growth or the emergence of trade tensions can negatively impact a country’s exports and economic prospects

What are some of the causes of a recession?

• Policy changes (such as a significant rise in interest rates)

• Impact of higher taxes and cuts in real government spending

• A demand or supply side shock or a combination of both

What are the stages that lead to a recession?

• Business confidence drops

• Firms cut back on production

• Lay-offs of some workers

• Fall in incomes of those affected

• Rise in precautionary savings

• Retail spending drops

• Wider decline in demand and output

• Supply chain businesses are affected

• Economy loses momentum

• Unemployment may start rising

• Housing market feels impact of downturn

• Decline in net wealth hurts sentiment

What are the economic and social effects of a recession?

• Fall in confidence- a drop in animal spirits

• Rising cyclical employment

• Lower rate of inflation with risk of deflation

• Rising social deficit for the government

What are the main characteristics of a recession?

• Falling real GDP

• Rising unemployment

• Disinflation

• Reduced business investment

What is meant by economic scarring (hysteresis)

Refers to the medium-long term damage done to the economies of one or more countries following a severe economic shock which then leads to a recession.

What can cause economic scarring?

• Fall in investment leading to an ageing of the existing capital shock

• Rise in long term unemployment and economic inactivity

• Increase in business failures

• Shrinkage in the capacity of financial system to lend

What are some examples of demand-side shocks?

• Economic downturn in a major trading partner

• Unexpected tax increases or cuts to welfare benefits

• Financial crisis causing bank lending/ credit to fall

• Bigger that expected rise in unemployment rates

What are some examples of supply-side shocks?

• Steep rise in oil & gas prices or other commodities

• Lock-down due to the corona virus pandemic

• Natural disasters causing a sharp fall in production

• Unexpected breakthroughs in production technology