Section 1         Economic Cycle

 

 

Lead in

All market economies have periods when consumption - spending on goods and services - rises. Consumers buy more, companies invest more, and production, income, profits and employment increase. These periods are always followed by periods when spending and investment fall, and unemployment rises. This is the economic cycle. The term " economic cycle " (or business cycle or boom-bust cycle) refers to economy-wide fluctuations in production, trade, and general economic activity. From a conceptual perspective, the business cycle is the upward and downward movements of levels of GDP (gross domestic product) and refers to the period of expansions and contractions of economic activities (business fluctuations) around a long-term growth trend.

In many ways, the term “business cycle” is misleading. “Cycle” seems to imply that there is some regularity in the timing and duration of upswings and downswings in economic activity. Most economists, however, do not think there is. History shows *, expansions and recessions occur at irregular intervals and last for varying lengths of time. For example, there were three recessions between 1973 and 1982, but, then the 1982 trough was followed by eight years of uninterrupted expansion. The 1980 recession lasted just six months, while the 1981 recession lasted sixteen months. For describing the swings in economic activity, therefore, many modern economists prefer the term “short-run economic fluctuations” to “business cycle.”

There are four phases that describe the business cycle. Here are some characteristics to watch in each phase of the business cycle:

1. Expansion: Many economic indicators, including GDP, employment, and incomes, are on the rise; corporate profits are rapidly expanding; and, monetary policy is still generally focused on providing stimulus for economic growth.

2. Peak: Corporate profits appear to be peaking; inventories and sales are growing in tandem; credit growth remains strong; policymakers are relatively neutral on taking any action; and, economic indicators are peaking.

3. Contraction: Economic indicators point to falling activity; credit becomes largely unavailable; corporate profits decline; monetary policy shifts towards easing rather than contraction; and, inventories and sales fall.

4. Trough: Economic indicators are relatively sideways; credit is still hardly available; corporate profits level off; monetary policy remains in easing mode; and, inventories begin to move towards lower levels.

    A period during which economic activity increases and the economy is expanding is an upturn or upswing. If it lasts a long time, it is called a boom. The highest point of the business cycle is a peak, which is followed by a downturn, during which the amount of economic activity decreases. If the economy keeps contracting for more than six months, the downswing is called a recession. A serious, long-lasting recession is called a depression or a slump. The lowest point of the business cycle is a trough, which is followed by a recovery, when economic activity increases again, and a new cycle begins.

NOTE: A downturn is also called a downswing or a period of contraction; a recovery is also called an upturn, an upswing or a period of expansion.

What Causes the Business Cycle? The business cycle is mainly affected by all the forces of supply and demand. In addition to demand, the business cycle is also heavily dependent on the availability of capital. This is known as liquidity, and is itself dependent upon interest rates.

When consumers are confident, they buy now because they know there will be future income from better jobs, higher home values and increasing stock prices. Even a little healthy inflation** can trigger demand by spurring shoppers to buy now before prices go up. As demand increases, businesses hire new workers, which further stimulates more demand. This is the expansion phase.

If demand outstrips supply, then the economy can overheat. In addition, investors and businesses compete to outperform the market, taking on more risk to gain some extra return. This combination of excess demand, and the creation of risky derivatives, created the housing asset bubble in 2005.

If demand isn't cooled down with higher taxes (fiscal policy) or higher interest rates (monetary policy), then the peak is not far off. You can always recognize a peak by two things: first, the media is saying that the expansion will never end. Second, it seems everyone and his brother is making tons of money from whatever the asset bubble is.

In the contraction phase, confidence is replaced by fear or even panic. Investors sell stocks, and buy bonds, gold and the U.S. dollar. Consumers lose their jobs, sell their homes, and stop buying anything but necessities. Businesses lay off workers, and hoard cash. Confidence must be restored for the economy to enter a new expansion phase.

 

economic cycle Syn. business cycle, boom-bust cycle	цикл деловой активности
consumption	потребление
fluctuation   Syn. swings	колебание, неустойчивость
Gross Domestic Product (GDP)   Gross National Product (GNP)	валовой внутренний продукт (ВВП): совокупная стоимость товаров и услуг, созданных внутри страны за определённый период; рост экономики обычно определяется изменениями реального ВВП (с поправкой на инфляцию  валовой национальный продукт (ВНП): суммарная стоимость всех товаров и услуг на национальном рынке, произведенных как внутри страны так и за её пределами за определённый срок (обычно за год)
expansion	подъем, расширение,увеличение
contraction	снижение, спад, сокращение, уменьшение
economic indicator	экономический показатель
monetary policy	кредитно-денежная политика
inventories a build-up in inventories	запасы, товарно-материальные запасы накопление товарно-материальных запасов
business cycle peak	пик, высшая точка экономического цикла
trough Syn. bottom of cycle   from the trough to the peak	самая глубокая точка (падения производства, цен),низшая точка цикла от низшей точки падения до высшей точки подъема
recovery Syn. upswing, upturn, period of expansion	подъем, оживление, восстановление экономической активности
recession Syn. downturn, downswing, period of contraction	рецессия, спад
boom	бум, быстрый экономический подъем
bust	резкое снижение деловой активности, спад
depression	депрессия, застой
slump	резкое, внезапное падение(цен), внезапный спад деловой активности
supply and demand excess demand     brisk demand for smth be in demand on the market	спрос и предложение избыток спроса, превышение спроса над предложением   высокий спрос на ч-л пользоваться спросом на рынке
liquidity	ликвидность, ликвидные средства(наличность и близкие к наличности активы)
overheat	перегреваться(об экономике): развиваться чрезмерно высокими темпами
outperform the market	показывать результаты выше рыночных, переиграть рынок
bubble     housing asset bubble	"пузырь"," мыльный пузырь": ситуация на бирже, когда цена акций или товара поднимается да уровня, не имеющего объективной основы       (часто преднамеренно и незаконно вздутые цены); чрезмерно " перегретый" рынок чрезмерно перегретый рынок жилья
fiscal policy	фискальная или финансовая политика; бюджетно-налоговая политика
necessities	товары первой необходимости
hoard cash	придерживать, не тратить деньги

NOTE:

1)history shows*-(зд.) согласно ранее полученным данным, предшествующий опыт показывает; historical statistics - статистические данные за определенный период в прошлом

 2) a little healthy inflation**- при появлении первых признаков регулируемой инфляции

1. Read and translate the text. Answer the following questions:

a) Gordon Brown's promise to free Britain from the economic cycle was music to everyone's  ears. Why?

b) What does human nature have to do with business cycles?

c) What causes the "boom and bust" cycle?

d) Why do you think the economic cycle forecast is of vital importance?

                                                        Boom  and Bust

Not that long after taking office as Chancellor of the Exchequer, Gordon Brown said in a number of speeches that he intended to free Britain from the old cycle of ‘boom and bust’. It was music to everyone’s ears. Britain had endured an unpleasant series of slumps, brought about by an overheating economy. Its citizens were ready to forgo a bit of boom if it meant not stomaching a bust.

Little more than a decade later Gordon Brown, now Prime Min­ister, had stopped repeating the mantra. The economy was sliding towards a recession and its worst housing slump in living memory, if not ever. Most embarrassingly of all, the downturn was worse than that created by his political rivals, the Conserva­tives, when they had been in office. Leaving aside Brown’s blushes, one thing was clear: reports of the business cycle’s demise had been all too premature.

Economies by their very nature are prone to cycles of boom and bust: markets swing from confidence to pessimism and con­sumers from greed to fear. What controls these variables is not altogether understood because they are subject to the whims of human nature. And as Brown’s experiences showed, attempts to tame the cycle have tended to fail dismally.

In theory, there ought to be an optimum level of economic activity at which a country could remain indefinitely. This is referred to as full employment; all the elements of production in an economy would be used to their optimum capacity. As such, inflation would not need to rise and the economy could grow at a consistent rate.

In practice, however, this optimal point has never been reached. Cycles of various sorts have occurred throughout his­tory. The Bible, for example, refers to periods of plenty succeeded by years of famine. The same rhythm applies to the sophisticated high-technology economies of the 21st century.

All major economies - the United States included - suffer these major swings in economic activity, which were first offi­cially documented in 1946 by Arthur Burns and Wesley Mitchell.

The growth trend. Every economy has a ‘ trend’ growth rate - the speed at which the economy has tended to grow over recent decades. For the US in recent years this trend growth rate has been around 3 per cent, while in the UK and much of Europe it has been slightly lower at around 2.5 per cent, meaning that they have expanded at a slower rate. The business cycle (often called the economic cycle) is simply a fluctuation of economic activity above or below that growth rate. The difference between the two is known as the output gap. An economic cycle covers the time it takes for an economy to go through a boom, into a bust, and back to trend again.

At the peak, an economy can grow very fast indeed, but often this expansion is short-lived, giving way to a fall - i.e. the economy contracts. If the economy contracts for two successive quarters, it is technically in recession. This goes hand in hand with higher unemployment and falling profits among companies.

Why cycle? There are a number of explanations for cycles, though in truth none is as convincing as the fundamental fact that human beings are emotional creatures, and can swing very quickly from optimism to pessimism and vice versa. One expla­nation involves monetary policy: changes in interest rates, whether by private banks or central banks, have the knock-on effect of either speeding up or slowing down the economy’s growth, as well as inflation and unemployment. Another tech­nical explanation revolves around the rate at which companies build up inventories - their hoards of unsold products. They tend to overstock these when growth is strong, since they expect the boom to continue, and to deplete them when the economy shrinks. In both cases, this makes the swings more violent than they ought to be.

Human experience is also an important factor. Some say that the seeds of a financial crisis are sown the year when the last banker who lived through the previous crisis retires. In other words, the more people forget the harsh consequences of a bust, the greater becomes the likelihood of similar mistakes being made again, generating another bubble.

In addition, unexpected events cause the economy to reel from one cycle to another. Clearly, few people expected the credit crisis that began in 2007 nor the collapse in oil prices a year later. The two together turned a downturn into a global recession. Perhaps the economy would behave more predictably without such shocks.

Others suspect that politicians are partly to blame, since they sometimes allow booms to get out of control in order to capi­talize on the ‘feel-good factor’ generated by, for instance, soaring profits, rising house prices and high employment. They follow pro-cyclical policies - puffing air into the bubble - rather than counter-cyclical policies aimed at deflating bubbles gently before they explode.

 

Chancellor of the Exchequer	канцлер казначейства: министр финансов Великобритании
(be) prone to	склонный, предрасположенный к ч-л
be subject to	(зд.) подлежащий ч-л, подчиняющийся ч-л
capacity	производственные мощности, максимальная производительность(о технике), номинальная мощность
years of plenty years of famine	тучные годы (Библ.) скудные годы(Библ.)
trend growth rate   economic growth rate	темпы роста экономики, соответствующие заранее спрогнозированным трендам; темпы экономического роста
output     output gap	выпуск продукции, продукция, объем производства;   спад производства; разрыв между фактическим и потенциальным объемом производства
knock-on effect	цепная реакция, эффект домино
deplete stocks	истощать запасы
tend to disposable income tends to grow	иметь тенденцию, быть склонным; располагаемый доход, как правило, увеличивается