Economic Cycles

Economic cycles refer to the fluctuations of economic activity around its long-term growth trend. The cycle is produced repeatedly in time.

If you observe the evolution of the GDP growth during a long period, you can see that waves appear regularly. Every wave corresponds to an economic cycle.

In the long term, the evolution of the GDP can be distinguished in four phases:

Tendency: this is the direction the economy faces in the long term.

Economic cycles: diversions that are produced because of the tendency and which are repeated regularly. They usually last a few years.

Seasonal variations: re-occuring movements that are produced every year.

Random variations: irregular variations

If we examime the cycle we can distinguish four phases:

Valley: this is the lowest point in the cycle and it is characterised by its underutilised productive capacity e.g. unemployement, companies profit losses, investments are static, etc.

Recovery: sales and profits begin to increase, unemployment decreases, new investments are made, prices begin to increase slowly. .

Peak: critical point of the cycle. Productive capacity is used which makes it difficult to maintain the rythm of growth; stress on prices begin to be stronger; it is difficult to find qualified labourers; company expectations begin to deteriorate in the face of inflation, negatively reverbarating the foreseen investments.

Contraction: the government, in its fight against inflation, adopts measures to cool down the economy, which equates to falling sales and profits; unemployment starts to recover; in this atmosphere of despondency, investments suffer; people stop paying mortgates etc and companies go bankrupt.

It is necessary to point out that in an economic cycle, the phase of increase is not necessarily the same duration as the phase of decrease. In fact, lately the upward phases have been notably longer than the downward phases.

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