Levers That Controls Business/Economic Cycle

Posted by alice hall on March 9th, 2020

Business and economic cycles mainly belong to the same genre. The notion reflects the various stages that an economy goes through and represents its fleeting essence. And is measured by the growth or decline in output resulting in subsequent fluctuation in GDP. It begins when an economy experiences an expansionary trend. In this mode, there is an ample increase in production, employment and all other indicators such as consumer confidence also show an upward trend along with the rise in equity markets. Since the free cash flow of the companies enables them to declare ample dividends amidst the bulging bottom lines representing greater profitability. 

In the next stage, which is a peak. The output levels reach their maximum, and there is no further room for growth. This is a stage, where the economy is heating up and is at full throttle. This is the highest level between the expansion and the contraction. All the indicators like consumption, employment, etc. are stretched to the maximum. The expanded bottom lines manifesting expansionary trend begin to show signs of shrinkage and retreat.

Business cycles are generally controlled by tools such as interest rates, quantitative easing, fiscal stimulus etc. Interest rates are a standard mechanism in that, they regulate the money supply into the economy. It has a direct impact on GDP growth, as it is the most potent tool along with QE in the investment process and capital formation. Fiscal policy is another tool, which facilitates and impact the business cycle. As through public spending, the government tries to steer the business cycle and directs it as per its desires.

In Pakistan, there is no set mechanism to manage business/economic cycles. Interest rates are the lead mechanism is this case. But, interest rates are also a means to control inflation. So, due to its dual role. It is difficult to make sure that all of its purposes are achieved. For instance, if the interest rate is kept higher to control inflation, which is the case with Pakistan. Then the system’s ability to raise capital and investment jeopardizes. And consequently, this scenario impacts the business cycle negatively, making it difficult to abandon the trough that it is experiencing.