Economic Cycles - Economic Recovery

In this video we analyse and evaluate the causes of an economic recovery - a key stage in a country's trade (business) cycle.

What is an economic recovery?

• A recovery happens when an economy returns to positive actual growth following a recession
• During a recovery, real national output moves closer to the previous peak
• The amount of spare capacity starts to fall – measured for example by the output gap and the unemployment rate
• Eventually, both output and employment recover to where they were before the recession

An economic recovery is the phase of the business cycle that follows a recession. It may take several years for national output to recover to where it was before a recession. There is no single cause of a recovery. Monetary and fiscal policy decisions are important. So too, economic events in other countries.

What can bring about an economic recovery?

• Monetary policy stimulus: Lower interest rates / expansion of quantitative easing and also a depreciation of the exchange rate

• Fiscal policy stimulus: (And possible fiscal multiplier effect)" Cuts in direct and indirect taxes to increase disposable income along with increases in government spending (automatic & discretionary)
• Supply-side economic reforms perhaps driving an upturn
• Turning points in the global economic cycle affecting exports
• Recovery in asset prices such as shares and property prices
• Gradual return of confidence (improved animal spirits)

An economy tends to go through significant change during recovery. Patterns of employment can change, industries will grow at different rates. Government policy priorities may change too. Recovery can be hampered by unexpected external events / shocks.

Threats to UK economic recovery in 2022

• Cost of living crisis – inflation surging / labour shortages
• Impact of Russian invasion of Ukraine
• Continued supply-chain disruptions caused by the pandemic
• Emerging impact of Brexit on costs of UK export businesses
• Rising interest rates / high levels of household & business debt