Business Cycle
Characteristics of the Business Cycle
Boom
In this phase we would expect the following characteristics:
Main Characteristics:
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High levels of economic growth
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High levels of inflation
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Low levels of unemployment - (zero cyclical unemployment)
Other Characteristics:
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High levels of confidence
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Low levels of savings (everyone is spending as everyone is confident in the market and job security)
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Levelling off of business profits (business profits have slowly stopped increasing)
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High cash rates
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High levels of durable and luxury good consumption
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Lower budget deficit or government surplus
Example: 2012-13 Mining Boom
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Economic Growth - 4.3% (above 3-4% target rate)
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Inflation - 3.8% (above 2-3% RBA target)
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Unemployment - 4.9% (natural rate)
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Cash rate - 4.75% (highest since the pre-GFC boom)
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Budget Outcome - Deficit of $23.4 billion
Trough
In this phase we would expect the following characteristics:
Main Characteristics:
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Low levels of economic growth
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Low levels of inflation
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High levels of unemployment - (high cyclical unemployment)
Other Characteristics:
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Low levels of confidence - emergence of the tragedy of the thrift
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High levels of savings - job insecurity and lack of market confidence causes people to save
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Lowest business profits (business profits have slowly stopped decreasing)
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Low cash rates
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Low levels of durable and luxury good consumption
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High budget deficit
Example: Global Financial Crisis (2008-09)
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Economic Growth - 0.3%
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Unemployment - 5.9%
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Inflation - 1.1%
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Budget Outcome - $54.8 billion deficit (highest ever recorded)
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Cash rate - 3%
CPI-DISC
An easy acronym that helped me describe the characteristics of a phase of the business cycle is CPI-DISC that stands for:
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Confidence
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Business Profitability
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Inflation rate
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Level of durable and luxury good consumption
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Interest rates
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Level of household savings
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Cyclical unemployment