Business cycle

Definition

A business cycle refers to the recurring pattern of expansion and contraction in economic activity that occurs over time.

What is a business cycle?

The business cycle is a natural feature of market economies, driven by a combination of various factors, including changes in consumer spending, investment, government policies, and external economic conditions.

Phases of the business cycle:

  1. Expansion: This phase is marked by increasing economic activity, rising production, employment, and consumer spending. Businesses experience growth, and optimism prevails in the economy.
  2. Peak: The peak is the highest point of economic activity during an expansion. It represents the climax of growth, and it is often characterised by high employment rates and robust economic indicators.
  3. Recession: Following the peak, the economy enters a recession phase, marked by declining economic activity. This phase is characterised by falling production, rising unemployment, and a decrease in consumer spending.
  4. Trough: The trough is the lowest point of economic activity during a recession. It represents the bottom of the cycle, and economic indicators are at their lowest. Unemployment is typically high during this phase.

Business cycles vary in terms of duration, intensity, and the factors influencing them. Some cycles are short-lived, while others can extend over several years. 

Businesses often experience the effects of the business cycle through changes in consumer demand, access to credit, and overall economic conditions. During expansions, businesses may thrive, while recessions can pose challenges such as reduced sales and financial pressures.

Example of business cycle

  1. Expansion (Boom):
    • Imagine a scenario where the economy of the fictional country of Prospera is experiencing robust growth. GDP is increasing, businesses are expanding, and employment is rising. Consumer spending is high, and investors are optimistic about the future.
  2. Peak:
    • The economy reaches a peak when it’s operating at its maximum capacity. Prospera’s economy is at its strongest, with high levels of production and low unemployment. However, signs of potential overheating may emerge, such as inflationary pressures or asset bubbles.
  3. Contraction (Recession):
    • After the peak, the economy enters a contraction phase. In Prospera, demand starts to slow, businesses may cut back on production, and unemployment may rise. Consumer and business confidence may decline, leading to reduced spending and investment.
  4. Trough:
    • The trough represents the lowest point of the business cycle. In Prospera, economic activity has bottomed out. Businesses may be operating below capacity, unemployment is high, and consumer confidence is at its lowest. However, this phase also sets the stage for recovery.
  5. Recovery:
    • The economy begins to recover as conditions improve. In Prospera, policymakers may implement measures to stimulate economic activity, such as lowering interest rates or implementing fiscal stimulus. Businesses regain confidence, production increases, and unemployment starts to decline.
Ready to grow your business?

Clever finance tips and the latest news

Delivered to your inbox monthly

Join the 95,000+ businesses just like yours getting the Swoop newsletter.

Free. No spam. Opt out whenever you like.

Our offices:

Disclaimer: Swoop Finance helps South African firms access business finance, working directly with businesses and their trusted advisors. We are a credit broker and do not provide loans or other finance products ourselves. We can introduce you to a panel of lenders, equity funds and grant agencies. Whichever lender you choose we may receive commission from them (either a fixed fee of fixed % of the amount you receive) and different lenders pay different rates. For certain lenders, we do have influence over the interest rate, and this can impact the amount you pay under the agreement. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Swoop Finance can introduce applicants to a number of providers based on the applicants’ circumstances and creditworthiness. Swoop Finance (Pty) Ltd is registered with CIPC in South Africa (company number 2023/820661/07, registered address 21 Dreyer Street, Cape Town, South Africa, 7708).

© Swoop 2025

Looks like you're in . Go to our site to find relevant products for your country. Go to Swoop