What Is A Business Cycle? Facts You Should Know
A business cycle can be referred to as the “ups and downs” of an economy.
SMEs in Africa can make more informed business decisions if they sustain an understanding of a business cycle. The government can also create better policies when there is an understanding of what a business cycle is. Business cycles affect individuals, investors, businesses and the government in various ways. As an individual, a business cycle can affect job hunting or investing. As a business, it can affect productivity and profits.
In this article, we will look at what a business cycle is, the stages/phases of a business cycle, and why it is important to understand business cycles. Let’s dive in!
What is a Business Cycle?
The term ‘Business Cycle’ which is also referred to as the economic cycle or trade cycle is a series of stages in an economy as it expands and contracts.
It is measured primarily by the rise and fall of the Gross Domestic Product (GDP) in a country. GDP refers to the value of goods and services produced in a geographic location within a specific period of time, usually within a year.
Business cycles are universal, and all economies experience periods of growth and declines.
Various factors, both internal and external, affect the behaviour of a business cycle. Some of which are natural disasters, wars, economic policies, money supply, etc.
Stages of a Business Cycle
A business cycle goes through four stages or phases. These phases are:
- Expansion
- Peak
- Contraction
- Trough
Let’s look at each of these phases!
Expansion
This phase is known as the “Up” period. In the expansion phase, businesses and companies grow at a steady rate with production and profits increasing. Unemployment remains low, and the stock market performs well. There is an increasing demand for goods and services at this stage, which causes prices to go up too. As a business owner, you might hire more workers to meet the increasing demand for your product or service. You could also decide to pay already existing workers to work overtime. During this period, customers are willing to pay more than usual to get the work done. GDP growth rate is between 2%-3%. Inflation is at the range of 2% and unemployment between 3.5%-4.5%.
In Nigeria, expansion periods occurred in the 1970s due to positive oil shocks. This period was referred to as the “Oil Boom”.
Peak
At the peak phase, economic activities are at the highest and the economy is considered to be spiralling out of control. Investors are overconfident and are increasing their prices. Everything at this point seems highly-priced.
As an SME in Africa, you would likely notice that demands far outweighs supply even while your profits are also rising rapidly. Customer complaints rise as businesses are unable to meet up with the increasing demand. At this point, neither the business nor the economy can sustain a high level of economic activities. A contraction is inevitable.
Contraction
At this phase, economic activity is on its way down. Workers might be laid off to cut down on costs. Unemployment numbers begin to rise, and the GDP growth rate is below 2%. At this stage, businesses begin to cut down on their activities. Demand drops, leading to a decrease in production, consumer purchases, income and expenditure. When GDP declines for two consecutive quarters, the economy is considered to be in a recession.
Trough
This is the cycle’s low point as the peak is the cycle’s high point. Here, the contraction phase lowers out, preparing for a rebound to the expansion phase. This phase is not always a smooth transition toward economic recovery.
This cycle sometimes continues within months and other times within years.
Understanding the business cycle as an SME in Africa
Understanding the business cycle helps business owners make better business decisions. Business owners can take advantage of expansions and also brace up for contractions in the economy. Understanding business cycles helps you know when to invest as well as when to borrow. During contractions or recessions, businesses can reduce expenses, diversify revenue, create emergency funds and effectively manage debt.
Do you have any questions or comments on business cycles and SMEs in Africa? Kindly drop them in the comment section below!
