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The Economic Cycle


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. The chart above shows the annual change in UK real national output since 1970. There have only been five full years of "technical recessionary conditions" during this period. For most of the last fifty years the economy has grown in size each year.


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?


Trend Growth

The long-run average growth of real output - known as trend GDP - estimated to be 2.5% for the UK over the last thirty years.  Trend growth is determined by the supply-side performance of the economy - in particular the annual increase (improvement) in the productivity of labour and capital. And, the quantity and quality of fixed capital investment which adds to the productive capacity of the economy.


The chart below shows the level of real national output for the British economy over recent decades. The trend growth can be taken as the long run average growth rate over time



Growth Of Output By Sector

GDP measures the value of output produced by the economy as a whole. 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




E-mail Steve Margetts