Business Cycle

Economies do not grow at a steady rate. Instead, they go through phases. During an expansion, output, employment and incomes rise. The expansion eventually reaches a peak, after which activity slows and may contract. A contraction that is deep or long enough is called a recession. The low point is called the trough, after which recovery begins and a new expansion starts.

Business cycles vary greatly in length and severity. Some expansions last more than a decade, while some recessions are brief and mild and others are long and severe.

Cycles can be triggered by many factors, including changes in interest rates, shifts in consumer and business confidence, financial crises, sudden changes in commodity prices and global events such as pandemics.

Governments and central banks try to smooth the business cycle using fiscal and monetary policy, for example by cutting interest rates or increasing spending during downturns. Businesses and investors pay close attention to where the economy is in the cycle, because it affects sales, profits, employment and the performance of different types of investment.