Economic Cycle

Reviewed by Annapoorna | Updated on Aug 27, 2020

Meaning of Economic Cycle

The economic cycle is the economic fluctuation between periods of expansion (growth) and contracture (recession). The current stage of the economic cycle can be calculated by factors, such as interest rates, total employment, gross domestic product (GDP), and consumer spending.

The economic cycle refers to the overall state of the economy in a cyclical pattern which goes through four stages. Economic cycles are a significant focus of economic research and policy, but the exact root causes of a cycle are widely debated among the various economic schools.

Insight on economic cycles is beneficial for businesses and investors. They also need to manage their strategy about economic cycles, not so much to control them but to survive and perhaps profit from them.

It also varies from country to country and is found and monitored by the Central Bank and Chief Economic Advisors to the government. The Reserve Bank of India (RBI) keeps a watch on these developments in India.

Stages of Economic Cycle

The economic cycle is also known as the business cycle. There are four stages in the economic cycle. If represented by the graph, it takes the form of expansion, peak, contraction, and trough. They are popularly known as a full recession, early recovery, late recovery and early recession respectively.

During the full recession stage, the Gross Domestic Product (GDP) retracts. The interest rates and consumer expectations bottom out, while the yield curve status is normal. Industries that profit during this phase are cyclical and transportation at the beginning. At the end of the stage, technology and industrials also benefit.

During the early recovery stage, economy, industrial production, and consumer expectations rise; the yield curve status gets steeper, whereas the interest rates are down. The industries that benefit are industrials at the beginning and raw materials as well as energy at the end.

The next phase is referred to as the late recovery stage. Here, the interest rate rises, whereas consumer expectations drop. The industrial production and the yield curve status are both flat. The industries, such as energy and services, benefit during the early and later parts of this phase, respectively.

The last stage is an early recession—industrial production and consumption fall in this stage. Interest rates are at their highest, whereas the yield curve status may either flatten or be inverted. Services profit during the beginning of this stage. While, other sectors, such as utilities, transportation, and cyclical, take away the profits at the end.

Considerations towards Economic Cycle

Governments and major financial institutions try to control the course of economic cycles and their impact. Fiscal policy is one at the hands of the government too. The government will employ expansionary fiscal policies to end a recession, which requires rapid spending on the deficit.

Conversely, by taxing and maintaining a budget surplus to minimize gross expenditure, it can use contractionary fiscal policy to prevent the economy from being overheated during expansions.