The subject of disaggregating the global business cycle (GBC) has been primarily discussed in academic and institutional circles. Disaggregating, or breaking down, this cycle brings visibility to factors that have an economic impact across countries, compared to those whose effects are limited to a nation’s borders. The GBC is defined as the change in global economic activity based on the five phases of the business cycle.
This view is useful in a broader context to understand the forces that influence an individual country’s economic performance, especially in today’s highly integrated business environment. The insights can also be applied to mitigate the risks of businesses operating in the global market.
The Business Cycle
A typical business cycle has five phases:
- Expansion – increase in employment, sales, and the demand and supply of products
- Peak – the point when growth reaches the maximum limit
- Recession – continued decline in GDP, typically for two consecutive quarters
- Trough – declining economic activity, leading to a negative growth rate
- Recovery – the end of the decline when demand starts to increase
According to a report by the Centre for Economic Policy Research (CEPR), International Business Cycle Co-Movement Through the Lens of Individual Firms (2016), countries that have greater levels of bilateral trade also have highly correlated business cycles that would cause easier “transmission of economic shocks” between those countries. While this may be a reasonable conclusion, the report also presents the view that countries with oft-occurring trade between them also exhibit other similarities that could predispose them to share the impacts of economic shocks. This latter point proposes that countries with similarities create the same types of economic shocks, which are not necessarily transferred due to high levels of bilateral trade.
The Bank of England produced a report, Disaggregating the International Business Cycle (2012), which looked at business cycle fluctuations based on industry-specific data during the Great Recession (2007 to 2009) for Canada, Germany, France, Italy, the UK, and the US. The report indicated that while the global factor explains most of the changes in GDP, country factors — elements common to all economic sectors in a country — explains the largest variance in productivity growth. This suggests that country-specific factors are the main drivers of a country’s position on the business cycle and, ultimately, economic performance.
In the report International Business Cycle Synchronisation: The Role of Financial Linkages (2016) prepared by CEPR, it was assessed if increased financial integration was responsible for more or less synchronised business cycles between nations. Financial linkages include comparable exchange rate policies, regulatory requirements, movement of capital, and monetary policies. The analysis concluded that despite the extent of financial linkage, the degree of synchronisation of business cycles is dependent on types of economic shocks. This finding would indicate that while countries align their financial infrastructures — and consequently harmonize business cycles, other factors still lead to divergent economic performance.
Putting It into Perspective
The findings from the research confirm that despite increasing globalization, multilateral trade agreements, and standardization across industries, there are still country specific elements that will create some independence from the global business cycle.
Countries with similarities are more prone to the same economic shocks versus being subject to transmission of those shocks from other countries.
The current challenges of the wine industry provide a good example of this scenario. Decreased labour supply, increased demand in restaurants, and nature are all factors affecting the wine industry, currently valued at over $360 billion. A typical order took five to six weeks to be delivered before the pandemic. Now, that order is taking three to four months for delivery. Despite the trading relationships between wine-producing countries, they are all facing the effects of rising demand as restaurants reopen and supply challenges arise due to the limited availability of shipping containers. The situation is made worse as unusually cold weather, wildfires, and drought have impacted harvests according to the Washington Post, June 2021.
Country-specific actions are the main driver of a country’s economic performance. Recognizing the influence of global trade, countries can implement domestic strategies to promote GDP growth.
Investment in research and development (R&D) is one area that countries have focused on to improve their economic standing. This strategy is supported by the report Technological Innovation and Economic Growth: A Brief Report on the Evidence (2019), which states that “[countries] risk triggering economic stagnation, lower living standards, and decreased economic dynamism if they discourage technological innovation.” Global spending on R&D has now reached a high of US$1.7 trillion, with the US and China spending over US$800 billion, according to UNESCO Institute for Statistics. Israel and South Korea spend a greater percentage of GDP on R&D — 4.95 per cent and 7.3 per cent respectively — compared with the US at 2.7 percent (World Economic Forum). These countries’ five-year average GDP growth rates were 3.4 per cent, 3 per cent, and 2.4 per cent respectively, according to Georank.
Country-specific factors affect business cycle synchronization despite financial linkages.
The reaction of Canadian banks to the 2008 financial crisis is a clear example of how a country-specific measure (i.e. increased regulation) protected the Canadian banking system and decoupled it from the international fallout, despite Canada being a global trading partner. In 2011, the National Bureau of Economic Research found that Canada’s stability was proven by lack of bank failure and bailouts, resulting in a less severe recession than that south of the border.
Disaggregation of the global business cycle is a useful discussion when comparing the growth or recovery of countries, despite their being inextricably linked due to globalization. Furthermore, this topic is helpful for businesses to understand how cross-border or multinational operations are affected by country-specific factors.
- Awareness of economic shocks caused by domestic factors versus transmission from other countries provides confidence in controlling economic recoveries.
- Investments to increase productivity and promote innovation will help countries and businesses lead in globally connected industries.
- Interventions via fiscal policy and regulation can buffer nations from the spread of negative global economic events.
Nigel Taklalsingh | Contributing Writer