Business Cycles

Business Cycles are fluctuations in economic activity that occur in most modern economies. They trace out a wavelike pattern with a length of between 3.5 and 7 years. Since 1945 the duration of periods of above-average economic performance has usually been greater than that of below-average performance with a general rise in the long-term average. The peaks in economic activity are normally higher in successive cycles.

Business cycles are divided into phases which describe economic activity as it moves from a peak to a trough and back. They describe the behaviour of a variety of economic indicators which reflect basic business conditions, although in complex economies the government role in establishing such conditions is necessarily measured at the same time.

Important indicators are industrial production, exports, imports, railway freight loadings, construction contracts awarded and bank clearings. Occasionally monetary indicators are also included as descriptive statistics. To achieve precision these data are taken weekly or monthly; together they trace out a reference cycle which maps the congruence of peaks and troughs in an attempt to indicate average business cycle behaviour.

Some indicators persistently tend to peak and trough before others and are described as leading (as opposed to lagging) indicators. In Canada, exports and construction contracts are leading indicators because of the export orientation of the economy and the important role played by the construction industry in natural resource development. Although this analysis is normally applied to the economy at large, there is evidence of significant difference in business cycle behaviour between the various regions of Canada in both the timing of cycles and their severity.

Business cycles are a phenomenon of relatively developed and diversified economies. They are thought to originate from the timing of real investment and the adjustment of inventories of goods, particularly those with some manufacturing component. In Canada's open economy these influences are both domestic and foreign.

Marxist interpreters hold that business cycles are inherent in the capitalist system and are generated by the method of appropriating surplus value; that they are simply one set of a structure of cycles, some of which are thought to be of very long duration. Non-Marxists view the business cycle as being independent of business ownership and more deeply rooted in investment, in its inevitably lumpy nature, and in the nature of both domestic and international trade. Marxists and non-Marxists agree that the Kuznets cycle of 15 to 25 years duration, evident in the international economy of the late 19th and early 20th centuries, and the business cycle are linked.

Probably the first evidence of a business cycle phenomenon in Canada occurred 1854-59. A peak in economic performance, associated with the demand growth brought about by the CRIMEAN WAR and the RECIPROCITY Treaty with the US, was followed in 1857 by a recession brought about by factors which included a slackening in the pace of railway construction. The recovery phase was brought about by both an increase in domestic investment and a revived export demand.

The post-1850 business cycle was the product of growing market integration, which was itself linked to the new transport and communications forms: steamships, railways and telegraphs. The Canadian economy grew in size and scope as a result of this integration, and the first appearance of the business cycle was concomitant with the first major signs of industrial diversification.

Some 19th-century business cycles were almost wholly domestic. The best example is that found in the 1880s which was almost exclusively dominated by the pace of transcontinental railway construction; the cycle peaked in 1885, the last year of major new construction on the CPR.

Many business cycles were, in contrast, associated with both booms and crises in the international economy. Prosperity immediately following Confederation was brought to an end by a domestic response to the worldwide financial crisis of 1871-72 and its consequent restriction on the availability of investment capital.

A trough in 1889 coincided with a similar but less severe international crisis. Business cycles were also governed by non-crisis international forces such as the peak in British lending to the international capital market in 1913.

All evidence suggests that before 1914 there was a growing coincidence of business cycles in Canada and the US, Canada's major trading partner. However, between the world wars the transmission mechanism weakened. The GREAT DEPRESSION, the most famous of all business cycles, was brought about by more than the usual influences of cyclical motion: the instability of the international structure of both trade and payments mechanisms; inappropriate exchange rate policies; and world instability in certain commodity markets.

Since 1945 there has been an increasingly similar pattern of business cycles in Canada and the US. Cycles transmitted from the US with both a shorter lag and an increasingly similar amplitude have been the dominant feature of recent Canadian business cycle history. Business cycles often become associated with particular events: eg, the Korean War expansion and a natural resource boom in Canada in the early 1950s; the Eisenhower recession of 1959; the oil crisis of the early 1970s; and the monetary contraction of the early 1980s.

The trough in economic activity in 1982, while part of a wavelike pattern, was accentuated by policies which acted to deepen the business cycle beyond what otherwise might have occurred. Such policies included the high nominal and real interest rates introduced by most Western governments during this period.

After a period of expansion from 1985 to 1990, the economy slipped back into recession in the second quarter of 1990. This economic slowdown was chiefly a result of high interest rates, a slowdown in the US and world economy and constraints on fiscal policy arising from the burden of international payments on the federal debt. Although this most recent recession was by no means as severe or as prolonged as the 1982 recession (GDP fell by 3.2% over 12 months in 1990-91 as compared to 6.7% over 18 months in 1982), the recovery was agonizingly slow.

Except for a negative dip in the second quarter of 1995, the growth has been steady at 0.5% to 1% per quarter up to 1999. The recovery has been driven chiefly by increased exports and by moderate increases in retail spending.

Author DONALD G. PATERSON

Suggested Reading
W.L. Marr and Donald G. Paterson, Canada: An Economic History (1980).

Links to Other Sites
Canadian Business Online
Electronic version of "Canadian Business," with numerous business links.

Canadian Foundation for Economic Education
The Canadian Foundation for Economic Education produces resources, both teaching kits and student materials, on the economy, economics, and entrepreneurship in all formats — print, video, and CD-ROM in both official languages