The Economic Cycle

Economies tend to develop not evenly but in waves. An economic boom with high growth rates and rising employment is followed by a downturn with low growth rates or even declining production and fewer people in work. Such economic cycles are the result of positive and negative shocks. Technical progress, for instance, can cause an upswing, whereas soaring oil prices may result in a downturn (supply shocks). Revaluation of a country’s currency weakens its exports and can thus herald an economic decline. Positive expectations on the part of business leaders, on the other hand, can raise the demand for investment and lead to an upswing (demand shocks). Government policies can also trigger economic fluctuations.

 

In bad times there is a tendency for the government to support demand across the whole economy by means of debt-financed public spending. Often this involves an attempt to stimulate consumption. However, it would make more sense to take measures which strengthen both short-term demand and long-term growth potential, for example by investing in infrastructure and education. However, all debt-financed policies aimed at stimulating the economy run the risk that the debt will not be repaid when business is booming again.

 

The IW, the Cologne Institute for Economic Studies, regularly analyses economic developments and publishes economic forecasts twice a year, in spring and autumn. The Institute also conducts a biannual survey on the state of the economy. In this way, the IW helps political and business leaders to improve the basis for their decision-making.