What is a business cycle?
The economic activity of businesses changes over time, expanding or contracting. A business cycle is when many different businesses all expand or contract at about the same time.
A classical business cycle refers to rises and falls in total production.
The growth cycle refers to changes in the growth rate of production.
The importance of business cycles
When business owners decide whether to hire or lay off staff, or buy new machinery, they need to consider whether businesses in their area, and businesses generally, are expanding or contracting.
Business-cycle fluctuations that are very long or big can lead to too much inflation (in the expansion phase), or not enough growth and too much unemployment (in the contraction phase).
New Zealand’s classical business cycles
Since the Second World War there have been nine classical cycles of expansion and contraction in New Zealand. Most of the periods of expansion lasted more than five years, while the contractions lasted about a year.
Causes of fluctuations
New Zealand’s business cycles have not followed a predictable pattern. Turning points in cycles have mostly been due to international factors, including:
- the Korean War wool boom of the 1950s (which triggered expansion)
- the oil shocks (dramatic price increases) of the 1970s (contraction)
- the Asian financial crisis of 1997–98 (contraction)
- the US financial crisis of 2007–8 (contraction).
Local factors such as droughts, immigration levels, government policies, house prices and the exchange rate can also affect business cycles.