Recessions and Business Cycles

Recessions and Business Cycles

Recessions and Business Cycles

Recently, it was announced that Canada had entered a technical recession after having two consecutive quarters of negative economic activity. While the recession was very slight, it created enormous amounts of fuel to the recent 2015 federal election debates. There is a growing interest among Canadians to understand business cycles and here, we’ll be presenting a basic yet detailed description of these cycles.

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Business Cycle Summary

Business cycles are simply just fluctuations in the total economy, being either growth or contraction. These fluctuations are so powerful that they shape governmental decisions (more discussed later.) The business cycle is made up of four phases; expansion, peak, contraction and trough. The trough is the lowest point of the economic cycle and the peak is the greatest. Contractions are also known as recessions and depressions (most severe version.)

A business cycle usually lasts between one to twelve years, although some historical examples, like the great depression have been more severe. Business cycles are also continuous with a trough ending with expansion.

Expansion Business Cycle

The expansion phase is what everyone likes the most, we see a continuous increase in the underlying economic activity. Businesses increase their activity and profits increase. This leads to increased hiring of employees and a lower unemployment rate. Consumers and businesses then buy more goods and equipment that further fuel economic growth. Inflation, increases in the expansion phase.

Peak Business Cycle

Economic activity begins to exhibit decelerating growth rate and businesses slow their hiring rate. Consumer and business spending still grows, but at a slower rate.

Contraction (Recession) Business Cycle

This is the phase that creates turmoil in the economy. Economic activity declines and businesses react by reducing employment hours, freezing hiring and then laying-off employees. The unemployment rate increases and individuals consume less. Businesses also reduce their production and investments. The cycle self-perpetuates until a trough is reached and the cycles starts again with an expansion. As previously mentioned, a technical recession occurs when the economy contracts for two consecutive quarters.

Impact of the Business Cycle on Government

The business cycle has a very large impact on governmental policies. These policies are often in response to uncontrollable economic events. For example, in times of recession, we see a reduction in government revenue as overall income and corporate taxes decline (less Canadian’s employed and reduced corporate profits.) At the same time we see an increase in government expenditure as more money is spent on programs like employment insurance, welfare, etc. Therefore, the natural effect of a recession is a government deficit and now the government must act in response to this. When the economy does well, Government revenue increases and this creates a greater probability of a surplus.

Well that’s it for this week, thanks again for reading about business cycles. If you have any questions please contact me at info@ffcoach.ca or 647-289-0012. Also, please don’t forget to sign-up to our super awesome newsletter below!

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