Q&A - What is the business cycle?

Looking at the chart of economic activity in the UK, you may be able to spot that there is a regular pattern in the rate of economic growth. This is known as the business cycle.

There are periods when economic activity is growing fast (e.g. GDP is rising by 3 or 4% per year).

There are periods when GDP is actually falling (negative GDP = a fall in the value of GDP).

The pattern of changes in GDP is known as the business cycle (you may also see if referred to as the economic cycle).

In the chart above, you should be able to spot two periods when economic growth has been negative. This occurred in 1991 and most recently during 2009.

Negative economic growth means that the value of economic activity is falling. Consumers are spending less; businesses are investing less or reducing production output.

A period in which economic growth is negative for more than six months is known as a recession. A prolonged period of negative economic growth is known as a depression.

By contrast, a period when economic growth is strong (e.g. percentage growth above the long-term average) is known as a boom.

You will see some other terms used to describe the state of the business cycle. In one way or other they are try to describe what is happening to the rate of change in GDP. For example, look out for these terms in the business news:

Slowdown: a slowing of the rate of growth in GDP (e.g. GDP growth of 1% per year rather than 3%). Note: GDP might still be rising, but just not as fast as people have got used to!

Downturn: similar to a “slowdown”. Commentators often refer to a downturn to describe a fall in something related to the economy. For example, there might be a downturn (fall) in consumer spending at the shops. That doesn’t necessarily mean that GDP will fall – there might be an increase in business or government spending that more than matches a fall in consumer spending.