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Business cycle

The pattern of growth and decline of economic activity over a period of time, measured by the percentage change in GDP (Gross Domestic Product). See GDP. The business cycle can be classified according to four stages: (1) Recovery (2) Boom (both growth stages), (3) Downturn (4) Recession (both decline stages). Changes in the business cycle can affect a business’s sales and so should be taken into account by a business when making decisions over strategy. The UK economy has followed a cyclical pattern of economic activity for the last 150 years, with periods of growth (recovery leading to booms) followed by periods of falling growth (recessions and ultimately slumps). This pattern has occurred every five years or so. The causes are not fully known but history has shown the cycle to be inevitable. Therefore, even though the economic prospects may currently look good for a business, a recession may follow. Consequently, a business needs to ensure that its cash-flow / liquidity position is high enough and borrowings low enough to survive an unexpected negative change in economic growth.

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