Economic Cycle Flashcards
What happens in the Recovery phase
Recovery
Not really a fifth phase, more a return to phase one…
Inflation and interest rates remain low
Consumer confidence starts to grow
People start to spend again
Demand starts to rises
Business production and profits start to rise
The cycle resumes again…
Describe the Recession phase
Severe economic slowdown
Business profits are weak
People aren’t spending as much money
Inflation falls
Interest rates fall to encourage cheaper borrowing and put more money in peoples pockets.
Severe enough and its known as a Depression.
Describe Slowdown/Contraction
Inflation could still be high at the start of a slowdown, therefore interest rates may not reduce straight away.
Demand is starting to fall
Business sales and profit start to decrease
Unemployment rises with some businesses going bust.
Inflation starts to fall
Interest rates will start to fall to encourage spending.
Describe the boom phase
The highest point in the cycle.
Economy growing at its fastest
Again interest rates are increased. As result debt payments will rise meaning people will have less money in their pockets to spend.
Demand will start to fall
Describe the expansion phase
Strong demand for goods and services
Growth in business sales and profits
Demand starts to overtake supply
Prices (inflation) starts to rise
Economy starts to overheat
Interest rates rise to dampen demand and slow expansion (aiming to reduce inflationary pressures)
What is a common metric to demonstrate how an economy is performing and what does it measure?
A common metric to illustrate how well an economy is performing is to look at its Gross Domestic Product (GDP).
Which is essentially a measure of the total of all goods and services produced over the last year within that country (domestic).A common metric to illustrate how well an
economy is performing is to look at its Gross Domestic Product (GDP). Which is essentially a measure of the total of all goods and services produced over the last year within that country (domestic).
When is the economy described to be contracting?
One quarter where GDP falls relative to the preceding quarter then the economy is contracting.
When is the economy described to be in a recession?
Two successive quarters of falling GDP constitute a recession.
When is the economy described to be expanding
Where GDP rises in a quarter compared to the previous one then this is an expansion.
When is the economy described to be in a boom?
Boom is where GDP is at its highest in the cycle before it starts to fall.
What is velocity when we look at the economic cycle?
One other term to know is ‘velocity’ which is a measure of growth that divides GDP by the money supply
How do cash accounts react in the recovery phase?
Returns will be low due to low interest rates, but the real value is maintained through low
inflation
How do cash accounts react in the boom phase?
Returns will improve in line with
rising interest rates, however this
increase will be dampened somewhat in real terms due to rising inflation.
How do consumers react in the contraction and recession phases?
Higher propensity to spend than save due to falling interest rates.
How do fixed interest perform in a recovery phase?
Likely to continue to perform well, as the fixed interest will be attractive in a low interest rate/low inflation environment.
How do fixed interest react in a boom phase?
Become less attractive, as interest rates may increase above the fixed interest payable. In addition, higher inflation will dilute the real value of capital/income.
How do fixed interest react in a contraction phase?
Become more attractive, as interest rates may fall below the fixed interest payable. In addition, lower inflation will increase the real value of capital/income.
How do fixed interest react in a recession phase?
Possibly the most attractive asset class in this environment, as the fixed interest will be attractive in a low interest rate/low inflation environment.
How do equities perform in a recession phase?
Likely to perform well, as company profits will start to improve and the cost for companies servicing debt will remain low.
How do equities react in a boom phase?
Will continue to be a good performer, as profits will be high, leading to increasing share prices and dividend payments.
How do equities react in a contraction phase?
Become less attractive, as falling profits will negatively impact share prices and dividend payments.
How attractive are equities in a recession phase?
Possibly the least attractive asset class in this environment, as share prices/dividends will hit lows and some companies may even fail.
