Business

Understanding the Phases of a Business Cycle and Their Impact

March 31, 2025
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Introduction

A business cycle is the natural increase and decrease of economic activity over a time frame. It has different phases based on whether the economy is growing or decreasing. MSMEs, investors, and government officials need knowledge about the business cycle as it helps them make appropriate decisions.

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Phases of Business Cycle

  1. Expansion

During this stage, companies have greater demand for their products and services, and they increase production. As a result, companies hire more employees, thereby raising the employment level. Individuals spend more money to incur expenditure, and this further stimulates demand. Most entrepreneurs use this stage to enlarge their businesses, and some will seek financial assistance through avenues such as business loan for women and other credit instruments.

Key features of expansion:

  • Employment increase
  • Increased income levels
  • Expansion in production and sales
  • A high level of consumer confidence
  • Increased business investment
  1. Peak

The peak is the highest point of the business cycle. It comes after a long period of expansion. At this point, the economy achieves its highest growth. But as it cannot grow forever, indications of deceleration begin to emerge. Prices can become too high (inflation), increasing the cost of goods and services. The stock market can also become unstable because of overvaluation.

Main features of peak:

  • High economic activity
  • Increasing inflation
  • Higher wages and cost of production
  • High business profits
  • Danger of overheating economy
  1. Contraction (Recession)

After the peak phase, the economy slows and becomes contracting. People purchase less, businesses sell less, and unemployment increases as firms lay off workers. Consumer spending decreases, and economic growth slows down or becomes negative. If the contraction lasts for a long time, it is called a recession. During this period, small businesses may face financial difficulties, and many seek financial aid through MSME loan apply options to sustain their operations.

Most important features of contraction:

  • Reduced business profits
  • Increased unemployment
  • Reduced consumer spending
  • Decreased investments
  • Declining stock prices
  1. Trough

The trough represents the lowest stage of the business cycle. It is the phase where economic activity hits its weakest point. The phase, though, does not exist forever. Governments can support by reducing interest rates or expanding public expenditure in order to fuel growth. Ultimately, the economy begins to improve, taking the cycle back to the expansion stage.

Major features of the trough:

  • Lowest level of economic activity
  • High level of unemployment
  • Low consumer confidence
  • Government intervention
  • Beginning of recovery

 

What Affects the Business Cycle?

  1. Policies of the Government

Governments employ monetary and fiscal policies to support the economy.

  • Monetary policy: The money supply and interest rates are controlled by the central bank. Decreasing interest rates stimulate borrowing and investment, leading to growth. Increased interest rates slow down the inflation, but can reduce economic activity.
  • Fiscal policy: The government varies taxation and public expenditure. Higher spending on infrastructure and social programs boosts growth, while higher taxes can slow it down.

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  1. Consumer and Business Confidence
     When people feel good about the economy, they spend more, driving growth. But if they worry about a downturn, they save more and spend less, slowing things down.
  2. Global Events
     Wars, pandemics, and financial crises can greatly impact the economy. For example, the COVID-19 pandemic slowed global growth due to lockdowns and reduced trade.
  3. Technological Changes

Technological advances and innovation may impact the business cycle. Emerging industries bring job and investment opportunities that support economic activity. However, automation can sometimes lead to job losses in certain sectors, causing temporary slowdowns.

  1. Supply and Demand

When supply exceeds demand, prices fall, and businesses cut back on production. When demand exceeds supply, prices rise, leading to inflation.

Conclusion

The business cycle is a critical component of every economy. As discussed above, every phase has a different impact on employment, consumer expenditure, and business profits. Government policies, consumer confidence, international events, technology, and supply-demand equilibrium are some factors that affect the business cycle. Knowledge of these phases and determinants enables firms, policymakers, and individuals to make effective economic and financial decisions.

NBFCs also play a critical role in backing businesses across the nation, offering financial solutions which enable small businesses to maintain and expand themselves. NBFCs tend to have simple lending terms, which make them a good choice as an alternative to banks in case of strict bank requirements for certain businesses.