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Business Cycle


Over time an economy usually goes through periods of growth (booms) and busts (recessions).  This is called the business cycle.




The chart above tracks real GDP for the UK since 1955. There have been three main economic recessions over the last thirty years (1974-75, 1980-81 and 1990-92) but over the long run real output has increased on average by a little over 2% per year.  There have only been five full years of "technical recessionary conditions" (negative economic growth) during this period. For most of the last fifty years the economy has grown in size each year.


Real national output does not rise or fall at a uniform rate. All countries experience fluctuations in their rate of economic growth - some more volatile than others!  The British economy experiences regular trade or business cycles. Annual and quarterly movements in real output are tracked to measure the cyclical movement of the economy.



When Real GDP is rising quickly the economy is said to be experiencing economic growth or recovery. When real output falls or when the growth of output is below its long run trend rate - then an economic recession exists. One full economic cycle normally last between 6-10 years - but this is by no means guaranteed.


Notice how the last recession came to an end in 1992 (in fact over the course of the year there was barely any noticeable growth to speak of!). But since then the economy has enjoyed one of the longest sustained expansions in output (and employment) in the post war period. Can this continue? Can the British economy manage at least a decade without experiencing another recession?



Benefits And Costs Of Booms

The British economy has enjoyed continuous growth of real national output since the late autumn of 1992. Eight years of growth inevitably brings a range of economic and social benefits - but there are also dangers and risks when an economy rides a fast growth path.



Potential customer base

During periods of economic growth incomes will rise, therefore customers will want to purchase more products.  This will be good news for firms.



Economic growth stimulates higher employment since labour is a derived demand.  Not all industries will share in the growth of an economy.


Fiscal dividends from economic growth

Growth has a positive effect on Government finances - boosting tax revenues and helping to reduce the budget deficit. More people in work, rising spending and higher company profits all contribute to an increased flow of revenue to the Treasury, allowing them to spend more money.


Growth and Investment

Rising demand and output encourages further investment by firms in new capital machinery.


Business Confidence

Sustained economic growth should have a positive impact on company profits & business confidence


Living Standards

Growth improves living standards and quality of life.




Inflation risk

If the economy grows too quickly there is the danger of inflation as demand races ahead of the ability of the economy to supply goods and services. Producer then take advantage of this by raising prices for consumers.



Fast growth can create negative externalities (increased pollution and congestion) which damages overall social welfare



Not all of the benefits of economic growth are evenly distributed. We can see a rise in national output but also growing income and wealth inequality in society. There will also be regional differences in the distribution of rising income and spending.


Growth Of Output By Sector

We can also track the growth of production in specific sectors such as manufacturing industry and service industries. The chart below shows the annual growth of real output for four separate sectors.



Over the last six years, the service sector has grown more quickly than manufacturing or construction. Transport and Communication industries have enjoyed rapid growth as has Business Services. In contrast the construction industry has been in technical recession since the 4th quarter of 1998 and manufacturing output also dipped in the 1st quarter of 1999.


It is often said that the UK has a two-tier economy with the industrial sector achieving slow growth of output whereas service industries have experienced above trend growth of demand and production


It is also possible to compare the rates of growth of the UK with other countries.


Further Reading




E-mail Steve Margetts