Explain it: The Business Cycle

Guest Author: ESYP

Introduction 

The baseline of all economic activity: the business cycle. This is the cyclical trend demonstrating the trend of economic activity. A typical business cycle lasts approximately 69-84 months. The business cycle has a few typical phases. Starting with an expansion as economic growth starts to build. When economic activity reaches a peak, it transitions into a peak. An extraordinary peak will be classified as a boom. Afterwards, as economic activity starts to slow and decrease, it transitions into a contraction. When economic activity reaches a low, it forms a trough. An extraordinary trough is a recession.

trade-cycle

Some of these terms may be familiar to you as media outlets frequently use terms like peaks and troughs, booms and recessions. But knowing the terms is just the start, knowing the impacts will help you be more aware and hopefully more successful.

How does this affect me?

It’s all good and jolly to know these terms but their implications are what separates your crazy uncle in his bomb shelter from the successful business people working at Wall Street. However speculating on the business cycle is not recommended due to the volatility of the finance sector and as such take large precautions if that is something you want to pursue. Luckily for Australians, we have never experienced a recession, measured by 2 consecutive quarters with negative economic growth in over 25 years as such the future outlook is bright.

You and me, we aren’t multimillionaires or owners of large businesses. Many of us don’t even have speculative assets, which are assets that have risk or losing outlay with the expectation of substantial gain eg. Stocks. Why does this business cycle thing affect us? The crux of the business cycle is that it allows you to see how the economy is performing as a whole and as such, gives you fair warning about your future.

Additionally the government uses the business cycle as one of the factors in setting the cash rate, which directly impacts the retail interest rates that banks are able to give us consumers. But we’ll go into that next time.

 

Tell us what aspect of finance you want covered next time!

 

Disclaimer: None of what we write is professional advice and as such the author(s) cannot be liable for decisions based on the presented info

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