9. The Cycle of Economic Growth and Recession
• Expansion
This is when the economy is growing: GDP climbs, employment rises, and consumer confidence is strong. Borrowing is easier due to low interest rates, which encourages spending and investing. Businesses hire more and increase production to meet demand. Stock markets typically perform well during this phase (Investopedia).
• Peak
At the peak, the economy reaches its highest output. Growth begins to slow as factors like capacity constraints and inflation pressures rise. Prices and wages may spike, and central banks often raise rates to cool inflation. This sets the groundwork for a downturn (Encyclopedia Britannica, Investopedia).
• Recession
Following the peak, economic activity contracts. GDP falls, unemployment rises, and consumer spending weakens. Stock prices often tumble. Recessions are marked by their “three Ds”: depth, diffusion, and duration, as measured by institutions like NBER (Investopedia). For example, the 2007–2009 Great Recession saw a 4.2% drop in GDP and 8.7 million jobs lost (en.wikipedia.org).
• Recovery
The economy hits bottom at the trough, then begins to recover. Output and employment start rising, and businesses invest again. Stock markets often rebound ahead of job and wage improvements. Once growth resumes and exceeds previous levels, the cycle loops back to expansion (Encyclopedia Britannica).
Why It Matters:
Understanding these phases helps households and businesses prepare:
- Save during expansion: Build emergency funds.
- Be cautious at the peak: Avoid overextending.
- Protect during recession: Stick to essentials.
- Reinvest during recovery: Take advantage of lower prices and improving markets.
The cycle isn’t regular—expansions and contractions vary in length and intensity—but recognizing its rhythms supports smarter financial decisions (Encyclopedia Britannica).
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