The Economic Cycle explained

The economic cycle is defined as the fluctuations of the economy between periods of expansion and contraction (recession). The most commonly used economic indicator to determine the current stage of the economic cycle is a country’s gross domestic product (GDP). There are other key economic indicators such as interest rates, unemployment and consumer spending to help determine the stage of the economic cycle.

Stages of the Economic Cycle

Expansion

GDP growth is accelerating, inflation is slightly rising and unemployment figures decrease as employment opportunities arise from an increased demand for goods and services. Interest rates will generally be lower, but will eventually increase as the expansion matures.

Peak

We usually determine the peak of the economic cycle when economic growth (as measured by GDP) reaches a ceiling. Most commonly, inflation reaches highs for the period and this has to be corrected to keep overall prices near their long-term equilibrium.

Recession

Economic growth generally slows down and we see unemployment rates rise as cyclical lay-offs take place. Inflation also decreases as the demand for goods and services decreases with higher coast of credit, associated with the higher interest rates that are in place to combat inflationary pressure from the most recent expansionary phase.

Trough

Unemployment usually hits a high for the cycle, GDP growth reaches a low point and interest rates are lowered to increase the demand for goods and services across the economy. At this point in time, prices have stabilized due to lower inflation. As such, the expansionary cycle can commence as interest rates are once again lowered to stimulate economic growth.

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Caveat Capital MGMT (Pty) Ltd is a CATII – Authorized Financial Services Provider (FSP no. 24777) registered at the South African Financial Services Conduct Authority (FSCA).