A business cycle is the natural rise and fall of economic growth, with each cycle consisting of four phases: expansion, peak, contraction and trough.
Citing its latest study, the National Development Council said on Friday that Taiwan is in the expansion phase of its 15th business cycle.
The economy has yet to reach its peak, suggesting that the growth outlook remains positive, it said.
Recent economic data and GDP growth forecasts lend support to the council’s view, as there are no signs of a slowdown in local economic activity, despite a marked increase in market volatility and corrections in the equity markets.
The council also identified the peak and trough of the nation’s 14th business cycle, which began in January 2012, peaked in October 2014 and bottomed out in February 2016.
That business cycle lasted 49 months, with 33 months in the expansion phase and 16 months in the contraction phase, the council found.
As for the current cycle, the expansion phase has been going on for 24 months, since March 2016, and is likely to continue for a while, the council said.
Long-term data are needed to determine if the economy has peaked, but there are some useful gauges to analyze the cycle, such as changes in GDP growth, corporate earnings and inventory levels, as well as in credit growth and monetary policy.
UBS Group last week revised up its economic growth forecast for Taiwan this year from 2.8 to 3 percent. The readjustment could suggest that there is no concern that the pace of expansion would taper off any time soon.
Nonetheless, the economy’s boom-and-bust cycle has been shortening from the average 53 months seen in recent cycles. The last time that the boom-and-bust cycle exceeded the average was in the eighth business cycle, which lasted 67 months, from August 1990 to March 1996, with 54 months of expansion and 13 months of contraction.
Since then, the duration of each cycle has been under 50 months, suggesting that the economic expansions could not provide momentum strong enough to sustain longer expansion periods.
Meanwhile, contraction phases have arrived quickly with similar short durations, indicative of a balance between big fluctuations in economic activity, and the effects of the central bank’s monetary policy and the government’s fiscal policies.
Each business cycle has a different duration due to various local and international interruptions, but certain economic patterns seem to repeat themselves and people tend to panic over market volatility prematurely, because they are overly pessimistic about sudden market disruptions and unexpected macroeconomic events.
Last week’s marked decline in global stock markets, especially on Wall Street, has caused many investors to wonder whether another crisis is looming, which could stop current growth in its tracks.
However, experience shows that fluctuations or shocks can sometimes disrupt a trend, but the economy eventually resumes its cycle of boom and bust, and rolls from bust to boom.
Except for last week’s rout, there appear to be fewer “black swan” surprises on the horizon this year and the government has asserted that the economy’s fundamentals remain sound.
Even so, the markets are not always driven by fundamentals. Sharp movements can sometimes cause real economic distress.
The government has to tread carefully when addressing economic development plans and other reform bills, while investors should accept that stocks have entered correction territory and that the trend could continue as long as concerns persist about faster interest rate hikes due to the withdrawal of monetary support from major central banks.
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