EXPLAINED

Economic cycles

  • 05 December 2019
  • 1 minute

An economic ‘cycle’ describes the change in a particular economy’s growth over time, which may be months, years or even decades. Governments and central banks use various tools in their attempts to control the cycle’s progression. These include taxation and spending, and interest rates and the supply of money respectively.

Typically, the cycle follows a relatively consistent pattern and has four distinct stages: expansion, which represents an increase in economic output, and comes to an end when inflation and economic growth (gross domestic product or GDP) become too high to be sustainable; peak, the point at which expansion changes to contraction; contraction, when the economy is shrinking or in recession; and trough, the point at which contraction changes back to expansion.

One of the indicators used to gauge the current stage of the economic cycle is company profitability. For this reason investors tend to favour company shares over government bonds when economies are growing, and government bonds over company shares when economies are shrinking.

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