The Business Cycle and where recession feature in it


The cyclical growth and contraction of a country's economy, measured primarily in GDP, is called the business cycle.

The business cycle often affects the stock market, which represents the natural ups and downs of the economy.

Governments try to control the business cycle by increasing or decreasing spending, increasing or decreasing taxes, and changing interest rates.

Individuals can be affected by economic cycles in a number of ways, from finding a job to investing.

The business cycle, often referred to as the economic cycle or trade cycle, describes the various stages as the economy expands and contracts. It is usually judged by the repeated rise and fall of a country's gross domestic product (GDP).

All capitalist economies go through business cycles. These natural cycles of expansion and recession will occur in all of these economies, but not simultaneously. However, due to increased globalization, business cycles in different countries are more likely to occur at comparable times than in the past.

Understanding the different stages of the economic cycle can help individuals make lifestyle decisions, investors make financial decisions, and governments make policy decisions.

Stages of the business cycle

Think of business cycles as tides: the ever-changing natural ebb and flow of tides from high tide to low tide. Just as waves can rise at low tide or low at low tide, there can be intermittent countercyclical peaks in the middle of a period.

The business cycle shows how a country's overall economy changes over time.

In any business cycle, a long period of economic prosperity is followed by a long period of recession. A business cycle goes through four distinct phases in its life cycle, called phases: expansion, peak, contraction, and trough.


Expansion is the operating time that is considered "natural" or at least the optimal conditions for the economy. During the expansion, businesses and corporations kept increasing output and profits, unemployment tended to be low, and the stock market performed well. Consumers are buying and investing, and prices are rising due to increased demand for products and services.

When GDP growth is between 2% and 3%, inflation is below 2%, unemployment is between 3.5% and 4.5%, the stock market is in a bull market, and the economy is in a healthy expansion phase.


However, whenever those numbers start to fall outside the normal range, the economy is seen as out of control. Businesses may be expanding too quickly. Investors become arrogant and buy assets at inflated prices that are not backed by their underlying value. Everything has become too expensive.

All this hectic activity culminates in a climax. It occurs at the end of the expansion phase, indicating that prices and production have peaked. This is the turning point: there is no development opportunity, only one direction: down. Contractions are in progress.


It takes a certain amount of time to shrink from peak to trough. This is the time of year when the economy slows. Unemployment typically rises during a downturn, stocks are in a bear market and gross domestic product (GDP) falls below 2%, a sign that companies have scaled back their operations.

When GDP declines for two consecutive quarters, it is called a recession.


The troughs are the lowest points of the cycle, and the highs are the highs of the cycle. This happens when the recessionary phase bottoms out and begins to transition into the expansion phase and resume the business cycle. On the road to a full economic recovery, a comeback won't necessarily be quick or immediate.