The term economic cycle refers to the overall state of a country's economy. A complete cycle covers the period from expansion through contraction and back to renewed growth. Economic cycles are recurring, wave-like fluctuations in the level of economic activity within an economy. Various analytical methods are used to identify recurring patterns in economic data, particularly the upper and lower turning points of a cycle.
Real gross domestic product (GDP) is usually used as the benchmark for business cycle analysis.
Market cycles
Economic fluctuations follow more or less regular patterns (cycles) that fluctuate in waves around the long-term growth trend. The full business cycle lasts approximately four to eight years.
Market cycles are commonly divided into four phases:
- Early expansion
This phase is characterized by rising production levels and increased capacity utilization. Inflation is still relatively low, as are interest rates. New jobs are created and employment rises. The overall economic sentiment is positive. - Late expansion
Production capacity is fully utilized. Inflation rises as workers’ wages and salaries, as well as other prices, increase. GDP growth slowly levels off and begins to decline toward the end of the late expansion. - Slowdown
This phase is characterized by a decline in economic activity. Unemployment rises slowly and short-time work is increasingly implemented. Investment, production, demand and profits decline. The overall mood in the economy is negative. - Recession
Capacity utilization is low and unemployment is high. Demand for goods declines, and household income falls. Corporate profits and investment weaken, and inflation falls.
Key characteristics of each phase:
| Indicator | Early expansion | Late expansion | Slowdown | Recession |
|---|---|---|---|---|
| Market expectations | slightly improving | rising | declining | sharply declining |
| Production | bottoming out | rising | stabilizing | falling |
| Interest rates | at cyclical lows | rising | peaking | falling |
| Yield curve | normal | steep | flattening | flat |
The transitions between cycles are fluid and the characteristics of the individual phases are influenced by numerous other factors.
The stock market is driven by the economy but does not necessarily move in tandem with it.
Author
Günther Kornfellner, CFA, CAIA
Derivate Trader, Bybit EU