Working within the business cycle
A Building Societies Association case study

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Page 2: The business cycle

Economic activity fluctuates over time and follows a general but irregular pattern where periods of strong economic growth are followed by weaker growth or even periods where economic growth falls. This pattern is known as the business cycle and it affects all economies over time.

Within the UK the level of economic activity changes depending on factors such as levels of business investment, technology innovation and government policies. Gross Domestic Product (GDP) measures this level of economic activity. GDP is the total value of all of the goods and services produced by business organisations within the UK.

When GDP increases over time, this represents greater economic activity and is defined as economic growth. During periods of growth, consumers spend more and businesses produce and sell more goods and services. This raises the total level of economic output. A period of relatively rapid economic growth is known as a boom.

Eventually the growth of economic activity reaches a peak after which the economy begins to slow down, as businesses decide they do not need to take on any more employees or that investment opportunities are less attractive. The boom is then followed by a downturn, and eventually a recession. This is a fall in the level of economic activity over time (although not every economic cycle involves a reduction in activity sometimes there is only a reduction in the rate of growth). The economy experiences negative economic growth as GDP begins to fall.

When a recession reaches the bottom (or trough), businesses are likely to lay off employees and produce fewer goods and services. Some companies may go out of business. However, once recovery starts, businesses invest more and consumers increase spending. This helps GDP to rise.

The activities of business organisations both drive and reflect the business cycle. As an economy goes through its various stages, business organisations have to manage their activities within each phase. Since building societies do not have to make profits for shareholders, they can respond to the business cycle in ways that provide the best possible outcomes for their members, whatever the circumstances

Building Societies Association | Working within the business cycle