Business cycle

Der Konjunkturzyklus, auch Wirtschaftszyklus genannt, bezeichnet die natürlichen Schwankungen in der wirtschaftlichen Aktivität einer Volkswirtschaft über einen bestimmten Zeitraum. Dieses Phänomen ist von entscheidender Bedeutung für das Verständnis des wirtschaftlichen Wachstums und der Rezessionen, da es alle Bereiche der Wirtschaft beeinflusst, von der Gesamtproduktion bis zur Arbeitslosigkeit. Ein tieferes Verständnis des Konjunkturzyklus hilft Regierungen, Unternehmen und Verbrauchern, informierte Entscheidungen zu treffen, die auf zukünftige wirtschaftliche Bedingungen abgestimmt sind.

What is the business cycle simply explained?

The business cycle describes the regular fluctuations in the economic performance of an economy. Put simply, the economy periodically goes through phases of upswing and downturn. During the upswing phase, or expansion, we experience growth: production increases, unemployment falls and consumer spending increases. The peak of this growth is known as the boom. This is followed by the recession phase, in which growth slows, the unemployment rate rises and economic output falls until it reaches its lowest point. From this point, the cycle begins again with a recovery phase.

4 phases of the economic cycle

The business cycle goes through four characteristic phases that are essential to understanding the cyclical nature of the economy. These phases reflect different economic conditions and have a significant influence on political and economic decisions.

Upswing phase (expansion): The expansion phase is characterized by increasing economic growth. During this period, production and employment rise while unemployment rates fall. Companies and consumers gain confidence, which leads to increased investment and spending. The upswing promotes innovation and can lead to structural changes in the economy as new technologies and markets emerge.
Boom: At the peak of the business cycle, the economy is operating at maximum capacity. This phase is often characterized by signs of overheating, including rising inflation and possibly interest rate hikes by central banks to cool down the economy. The labor market is tight and wages tend to rise rapidly, which strengthens purchasing power but also increases costs for companies.
Downturn phase (recession): During a recession, economic growth slows significantly or turns negative. Investment and consumer spending fall, which can lead to company closures and rising unemployment. The uncertainty in this phase often leads to a decline in consumer confidence, which further dampens economic activity.
Trough (depression): The trough of the business cycle is characterized by the lowest level of economic activity. Although challenging, this phase often lays the foundation for recovery. Low prices and interest rates can stimulate investment and consumption, allowing the economy to slowly regain momentum.

Factors influencing the economic cycle

The economic cycle is influenced by a variety of factors, which can be either external or internal. These factors interact in complex ways and determine the timing and intensity of the various phases of the cycle.

Central bank monetary policy: Central banks play a crucial role by controlling interest rates and money supply. Lower interest rates tend to encourage economic expansion by stimulating borrowing and investment. Higher interest rates can cool the economy to avoid overheating.
Government fiscal policy: Government spending and tax policy are also important tools for influencing the business cycle. In times of recession, increased public spending and tax cuts can boost demand and thus stimulate the economy.
Technological progress: Innovations and technological developments can increase efficiency and productivity, which promotes economic growth and can lead to expansion. However, these developments can also have disruptive effects by challenging existing industries and leading to structural change.
International economic relations: Globalization and international trade dynamics can also have a significant impact on the business cycle. Strong export demand can boost an economy, while trade conflicts or protectionist measures can dampen it.
Demographic changes: Long-term demographic trends such as population ageing or migration can influence the supply of labor and demand for certain products and services, which in turn shapes the business cycle.
Psychological factors: Consumer and business confidence also influence economic activity. Optimism can lead to increased spending and investment, while pessimism can have the opposite effect.

The interaction of these factors makes forecasting economic cycles a challenging task. Economists and policy makers need to analyze a variety of data and trends in order to take appropriate action and ensure economic stability.

Effects of ecological changes on the business cycle

Environmental changes such as climate change and the shift towards more sustainable economic practices are increasingly influencing the economic cycle. These changes have a direct and indirect impact on numerous industries and require adjustments in almost all sectors of the economy.

Energy industry: The transition to renewable energies is changing traditional industries such as coal and oil and promoting growth in new sectors such as wind and solar energy.
Agriculture: Climatic changes are affecting agriculture by altering growing conditions and crop yields, which in turn can lead to price fluctuations and supply problems.
Insurance industry: Increasing weather extremes such as storms and flooding lead to higher damage risks and therefore to rising insurance costs.
Regulatory changes: Laws and regulations aimed at reducing environmental pollution, such as CO₂ taxes or emissions trading systems, influence companies' operating costs and investment decisions.

These environmental factors are now an integral part of economic planning and influence the stability and growth of the global economy. Their impact on the business cycle shows how important it is to integrate environmental aspects into economic models in order to develop realistic forecasts and effective economic policies.

Control and management of the business cycle

Targeted management of the economic cycle is a challenging task that requires a sophisticated combination of monetary and fiscal policy instruments as well as regulatory measures to smooth economic fluctuations and promote stable growth.

Monetary policy measures: Central banks use interest rates and open market operations as their main tools to regulate the money supply and influence the economy. Lowering interest rates is intended to stimulate lending and thus investment and consumption, whereas raising interest rates serves to cool an overheated economy and curb inflation.
Fiscal policy instruments: Governments can intervene directly in the economic cycle by increasing spending and cutting taxes. These measures are particularly important in times of economic slowdown in order to stimulate demand and safeguard jobs. Conversely, in times of economic boom, tax increases and spending cuts can help to stabilize the economy and prevent it from overheating.
Regulatory intervention: To ensure the stability of the financial system and avoid excesses that could lead to economic crises, governments rely on strict regulation of the financial sector. This includes capital requirements for banks, restrictions on speculative activities and the monitoring of major financial players.
International coordination: In a globally networked economic world, national measures are often not enough to effectively control the economic cycle. International cooperation and coordinated policy approaches are required to manage cross-border economic effects and prevent global crises.

These in-depth strategies require continuous monitoring and adjustment, as the global economy is subject to dynamic changes. Only a proactive and well-coordinated approach can effectively mitigate the cyclical fluctuations of the economy and lay the foundations for long-term growth.

Historical examples of economic cycles

The study of historical business cycles provides valuable insights into the dynamic forces that shape economies. These cycles, characterized by alternating periods of growth and recession, are often the result of complex interactions between economic, political and technological factors. By studying significant events such as the Great Depression, the oil price shocks of the 1970s and the financial crisis of 2007-2008, we can understand how such crises were triggered and what long-term effects they had on global economic policies and market structures. These historical analyses are crucial to strengthen the resilience of modern economies to future shocks and to develop informed policy responses.

The Great Depression (1929-1939)

The Great Depression began with the dramatic stock market crash on October 24, 1929, known as "Black Thursday". This crash led to a sharp drop in consumer demand and business investment, which in turn led to a chain of bank failures and mass unemployment. Industrial production in the USA fell by almost 50%. The global impact was characterized by a sharp decline in international trade and protectionist measures such as the Smoot-Hawley tariffs, which further crippled global trade. The responses to this, particularly Roosevelt's New Deal, included sweeping reforms in economic and social policy that permanently changed the role of government in the economy.

Oil price shocks of the 1970s

The first oil price shock in 1973 was triggered by the OPEC countries' embargo in response to the USA's support for Israel during the Yom Kippur War. This led to price increases and supply shortages that triggered a global economic recession and a period of stagflation, characterized by simultaneous high inflation and high unemployment. The long-term effects included increased investment in alternative energy sources and greater energy efficiency in the affected economies.

The financial crisis of 2007-2008

This crisis originated in the US in the subprime mortgage market, where banks granted risky loans that were then sold globally as securitized financial products. When real estate prices fell, this triggered a chain reaction that led to massive losses in the financial sector. The ensuing credit crunch and loss of confidence led to the deepest and most far-reaching global recession since the Great Depression. In response, fiscal stimulus was introduced worldwide and financial regulations were tightened to strengthen the resilience of the financial system.