Recently, it has become increasingly easy to see the instability of the modern market, which significantly hinders business. In economy, we can distinguish several phases of the business cycles, which affect many economic processes. If you do not know what characterizes its various stages and how to reduce the negative effects of the recession on your business – take a look at our article!

Business cycles in economy – table of contents:

  1. What is a business cycle?
  2. Causes of business cycles in the Economy
  3. Types of business cycles
  4. Phases of the business cycle
  5. How to counter the recession in the company?
  6. Summary

What is a business cycle?

As you know, every economy is characterized by high dynamics and fluctuations, the phenomenon of the business cycles. It informs what stage, what condition a country is in, for example, in the designated period. With such knowledge, we can make better decisions in running our own business, investing or just everyday life.

When studying the phases of the business cycle, economic indicators are used, including the unemployment rate, GDP, CPI index (cost of goods and services), industrial production index (which measures the activity of industry in the country), investment rate, income level of the population, etc.

Causes of business cycles in the economy

Business cycles happen as the result of the following factors:

  • Change in the money supply, i.e., how much cash, financial assets, etc. are in circulation
  • Decrease in demand, i.e., less willingness of consumers to purchase goods and services – is due to fears of deterioration of the economy in the future, households seek to buy necessities
  • The way the country’s monetary policy is conducted (e.g., lowering/raising interest rates, lower/higher fiscal spending)
  • Introduce technological innovations to increase productivity, production potential, emphasis on R&D activities
  • Behavior and reactions of investors in the stock market, which may result, for example, in the bursting of the speculative bubble
  • The greater propensity of the public to consume goods or accumulate savings than to invest
  • Armed conflicts, natural disasters, etc.

Types of business cycles

The most common classification of economic fluctuations takes into account their duration. These include business cycles:

  • Seasonal Cycle
  • Lasts up to about a year, usually applies to selected sectors of the economy, e.g., tourism, agriculture

  • Kitchin Cycle
  • Lasts between 2-4 years, causes price fluctuations and a reduction in the inventory turnover rate, which indicates unnecessary warehousing of goods (which generates additional costs, companies should seek to monetize inventory and allocate funds for investment)

  • Juglar Cycle
  • Lasts between 8-10 years, there are changes in the level of GDP, unemployment rate and higher inflation

  • Kuznets Cycle
  • Lasts between 15-25 years, is caused by demographic changes and investment decisions

  • Kondratiev Cycle
  • Lasts between 40-60 years and concerns significant discoveries that revolutionize industry, economy

Phases of the business cycle

Business cycles can be divided into several phases. The duration of each of them can vary, due to the many changes taking place in the market. There are situations when different sectors in a country’s economy are in different phases of the business cycle, and this is as normal as possible. These include:

  • Recovery – GDP growth with a decrease in unemployment, the beginning of dynamic economic processes
  • Peak/overheating – the highest level of GDP index, “maximum” recovery of the economy
  • Crisis/downturn – falling GDP, rising unemployment rate, lower investment spending and inflation, greater supply than demand, resulting in lower inventory turnover. Costs resulting from the need to store unsold goods, in the long run, will force a reduction in production, resulting in lower profits. Lower revenue will make it impossible to maintain the same level of employment
  • Recession – the biggest drop in GDP and an even bigger increase in unemployment indicate that the economy in question undergoes a crisis, recession. Many companies in this situation declare bankruptcy

How to counter the recession in the company?

Knowing the characteristics of the various phases of the business cycle, you will be able to spot the signs of an impending recession. How to act to protect your business from bankruptcy and emerge from the crisis with a defensive hand?

  1. Introduce agile and lean solutions into your company
  2. You can do it by dividing the company’s processes into so-called Iterations, which involve analyzing each step separately (rather than the overall system). This allows you to see mistakes made in the process, waste of resources and make improvements. E.g., introducing hybrid work to reduce office maintenance costs.

  3. Take control of your financial situation
  4. Analyze the value of financial indicators, so as not to expose yourself to unnecessary risks. Estimate the company’s expenses and consider whether and how they can get reduced. Find out which operational processes in the company are not delivering the expected results. Try to find solutions to change this, and if you don’t find any – eliminate them. In particular, keep an eye on your debt level and pay off your financial obligations regularly if possible. Plan your budget rationally, in such a way that you have cash reserves, in case of unexpected expenses.

  5. Invest in job automation
  6. With technology, you can streamline many of your company’s processes and make your team’s work easier. Depending on your needs, you can invest in programs for data analysis, work planning and supervision, HR processes, external and internal communication, sales lead generation, etc.

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Economic crises caused by pandemics, military actions, and political decisions, among others, affect business fluctuations. The market is constantly shaping itself, taking different forms, which forces companies to adapt. By gathering information about the current and expected state of the economy, you can adequately prepare for adverse conditions. What’s more, implementing long-term changes in other areas of doing business will render your company not only security but also success, and a chance for growth.

Read also: Emerging markets – pros & risks

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Author: Andy Nichols

A problem solver with 5 different degrees and endless reserves of motivation. This makes him a perfect Business Owner & Manager. When searching for employees and partners, openness and curiosity of the world are qualities he values the most.