What is the business cycle and how can Allianz Trade help when in a trough?

‘Business cycle’ is a term used to describe fluctuations in an economy over a period of time – usually between one recession and the next. This could include expansions and contractions in a sequence of recurrent changes that are not usually periodic.

Because business cycle theory refers to fluctuations in a nation’s aggregate economic activity, it’s also sometimes known as the ‘economic cycle’. This aggregate economic activity is assessed using gross domestic product (GDP) and measures such as production, employment, spending, and income.  

Business cycles aren’t predictable and don’t last a standard length of time as there are a number of factors that can affect them. However, each phase usually lasts months or years, rather than days or weeks. Many organisations believe GDP to be the main indicator of change to come.

There are four main business cycle phases. These are expansion, peak, contraction and trough.

The business cycle is in expansion mode when it grows. Expansion starts at the trough of the business cycle and will continue until it hits a peak.

Thanks to a healthy flow of money, this can boost business confidence and growth. This is often when companies invest in new hires, technology, or expansion into new areas.

This is characterised by increased economic activity such as:

• Rising employment
• Rising incomes and company profits
• Rising prices
• Low interest rates
• Rising production

During expansion, it is easy to get carried away and take risks. Trade credit insurance can help inform and mitigate these risks, for safe and steady growth.

A ‘peak’ will eventually be hit where expansion is at its maximum rate. This peak in the cycle may come with a stabilisation before a decline begins.

During this short phase, many businesses will evaluate their finances and prepare for what may be in store. Trade credit insurance that once supported during the growth period may pivot to protection at the peak of the cycle. 

When the business cycle contracts, there’s declining economic activity as many people suffer cash flow issues and businesses often enter a protection mode. This can lead to a loss of business confidence, defensive measures being put in place, and it’s often characterised by falling prices, rising unemployment, or the withdrawal from some markets.

Why do prices decrease? Well, business cycle changes are hard to predict, so it’s common for businesses to not immediately adjust their outputs. This can lead to surplus supplies, an oversaturated market, and price decreases to ‘shift’ this stock.  

During contraction, trade credit insurance can secure your cash flow, protecting your trade receivables for 12 months, whatever the economic climate.

Contractions can lead to a recession, but it’s important to recognise the misconception that any contraction means we’re in a recession. A recession is not the entire contractionary phase. However, symptoms that lead to this will start at the peak of the cycle when the expansion ends.

It’s this fear of a recession that has the greatest impact on the business cycle – the phase does not cause this itself. Therefore, increased confidence could help minimise contraction.

Trade credit insurance can give you just that, allowing you to offer customers competitive deals and grow your business no matter the level of inflation or stage of the business cycle.

The lowest stage of the business cycle is known as a ‘trough’. During this period, spending and income are poor and many businesses and individuals review their finances ahead of an anticipated recovery.

Despite this, there are some industries that typically weather economy contractions better than others, such as utility companies, healthcare providers, and suppliers of consumer staples.

It’s during this trough that trade credit insurance really can come into its own as a form of business protection. Allianz Trade can cover your trade receivables for 12 months, protecting your business should a customer fail to pay or become insolvent and providing the confidence to trade and spend.

And, just because the UK is recessing, doesn’t mean other countries are experiencing the same. Countries that are far apart tend to trade together less, which can negatively affect business cycle synchronisation. Therefore, expanding into new markets using export credit insurance may be a viable option for agile organisations.

The UK is currently experiencing an expansion, rebounding from a mild recession at the end of 2023 with GDP rising strongly in the first half of 2024.

In fact, according to Allianz Trade research, we could see the economy grow by 1.2% in 2024, 1.8% in 2025, and 1.3% in 2026.

So, if you didn’t assess your business finances and processes during the 2023 trough, now may be the perfect time.

Read more:
How is inflation affecting business, and how can trade credit insurance help?

Whether you’re looking to protect or grow your business, we’re here for you. For over a century, we’ve helped our customers by giving them confidence in tomorrow. We monitor over 83 million companies worldwide with 1,700 credit analysts based in 62 countries to assess businesses and provide unmatched insights.

Get in touch with our team at Allianz Trade to learn more about our market-leading trade credit insurance and how we could help you.