The Economic Cycle

The economic cycle is the fluctuation of the economy between periods of growth and recession. Factors such as gross domestic product, interest rates, total employment, and consumer spending, can help to determine the current stage of the economic cycle.

Boom: An economic boom is the expansion and peak phases of the economic cycle.

Recession: A recession is when there is two consecutive quarters of economic decline.

Trough: A trough is the stage in the economic cycle where activity is at its lowest, prior to a rise.

Recovery: Recovery, is the economic cycle stage following a recession that is identified by a sustained period of improving business activity.

During a boom, growth is faster than the trend, there are high profits, low unemployment, high consumption and business, high demand for imports, high confidence, rising tax revenues, and inflation.

During a recession/trough there is declining AD, high unemployment, sharp falls in confidence and investment, de-stocking and discounting, a fall in house prices and construction, lower inflation rates, loose policy and low demand for imports.

During a recovery there is rising consumer confidence, high house prices, rising business confidence, high investment, an increase in construction and a loose policy.

The reason that the economy does not follow the trend growth is due too shocks that nobody can predict either to the demand side (e.g. higher corporation taxes) or too the supply side (e.g. weakening of the exchange rate and war).