The economic cycle and its phases

What is a business cycle?

In general, the economic cycle is defined by an alternation of phases of economic intensity that occur in succession: crisis, depression, recovery and expansion. The period between two crises is called the economic cycle.

The phases of the economic cycle

The crisis phase marks the end of an economic cycle but also the start of the next one. In fact, once the economy has reached the minimum point in terms of activity, the reaction of all market players (e.g. Imprese, Lavoratori, Stato) permette l’avvio di un’inversione di tendenza: increase in investments, production, sales and work in general. The moment of transition from a waning economic phase to growth does not depend on specific subjects but on the aggregate as a whole and for this reason the economic phases are considered market dynamics. The next phase is called depression or recession because economic activities continue to suffer from the crisis phase - the economy sees negative growth rates so that, technically, the term recession is used when the decline is recorded for two consecutive quarters. This is also the moment in which economic subjects evolve, both to avoid crises similar to the one they have just experienced and to regain momentum. The recovery and expansion phase therefore describes the period of prosperity of an economic system, which can last several years or only a few months. Elementi di mercato (es. calo della domanda) o esterni (es. natural disasters) can in fact interrupt economic growth and open the doors to a new phase of crisis.

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How long does an economic cycle last?

There is no defined and circumscribed duration for each phase, nor for the overall cycle, but the statistical analyzes on historical data have allowed us to establish an average duration of the cycles, classified as follows:

Short, or Kitchin cycles with an average duration of 40 months, do not necessarily reach the stage of depression. Typically, they are associated with specific sectors in which, for example, there is a change in consumer preferences but the Companies are not aligned (e.g. lack of production processes).
Medium, or Juglar cycles, with an average duration of 8-10 years. They are distinguished by the presence of cyclical expansions and crises. They could be defined as a succession of short economic cycles at the end of which the market fails to "recover" completely. It is not uncommon for them to end in a structural crisis with significant impacts on all economic areas.
Long, long waves or Kondratieff cycles, lasting around 50-60 years. During the expansion, the ascents are more prolonged and stronger, the crises are lighter and the recessions shorter; but during the depression the recovery movements are weak and brief, resulting in increasingly strong crises and prolonged recessions, until reaching the degree of general economic depressions that in contemporary economies typically translate into economic declines on a global scale.

Esistono numerosi studi sui cicli economici tra i quali particolarmente di rilievo quello di Ralph Nelson Elliott che, a partire dall’osservazione delle fluttuazioni della Borsa valori crea un modello tuttora utilizzato dagli analisti finanziari. The economist noted the presence of "waves" within each economic cycle, from the longest to the shortest: the underlying principle is that every action has an equal and opposite reaction and that this dynamic is reflected in the wave trend of the economic dynamics. Each economic cycle would therefore be composed of eight curves of which the first 5 describe the main market trend and the following 3 act as market corrections.

Controlla le tue finanze personali

Il ciclo economico di una famiglia o di una singola persona, riguarda l’alternanza che si può verificare all’interno delle proprie finanze e la capacità di stabilire un equilibrio tra entrate e uscite.

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