Economic growth and development are closely linked to the international business cycle. The international business cycle refers to the fluctuations in economic activity that occur across multiple countries. The globalisation of trade, investment, and financial markets has increased the interconnectedness of global economies, making countries more susceptible to the spillover effects of economic shocks and cycles.

Understanding the International Business Cycle

As mentioned, the international business cycle refers to fluctuations in economic activity experienced simultaneously by various economies around the world. These cycles are characterised by periods of rapid economic expansion (booms) followed by slowdowns or recessions.

Synchronisation of business cycles:

When a country experiences an economic expansion or recession, it can have spillover effects on its trading partners and the global economy as a whole. The degree of synchronisation has increased in recent decades due to the growth of international trade and financial linkages (i.e. increased globalisation).

How does the Business Cycle Affect Economic Growth?

The international business cycle has two specific phases: the expansion and contraction phases.

Expansion Phase:

During the expansion phase, there is typically an increase in consumer and business spending, leading to higher demand for goods and services. As consumption $(C)$ is a component of aggregate demand $(AD=C+I+G+(X-M))$, an increase in consumption will thus result in stimulation of aggregate demand. This in turn, stimulates economic growth.

Additionally, during the expansion phase of the international business cycle, we see an increase in global investments. This is because higher economic confidence encourages investment in capital goods, fostering more job creation and income generation.

Contractionary Phase:

Economic recessions or contraction phases lead to reduced consumer spending and business investment. This can stifle economic growth and lead to higher unemployment rates. This has a profound impact on developing economies which are hit harder during global recessions due to their higher dependence on exports and foreign investment. For example, the COVID-19 pandemic between 2019-2020 led to synchronised recessions in multiple countries, demonstrating how interconnected the global economy is. The downturn in multiple economies during this pandemic is represented by the following graph.

As we can see from the graph, all three economies drastically decrease during 2019, displaying the effects of business cycle synchronisation.

How Does the Business Cycle Influence Economic Development?

Economic development can be significantly impacted by the international business cycle, particularly in terms of long-term investments in health, education, and infrastructure:

Impact of Booms:

During economic booms, governments may have more resources to invest in long-term development projects that improve education, healthcare, and infrastructure. Considering a perfect economy, with no corruption and efficient economic policies, quality of life for individuals can significantly improve.

Impact of Recessions:

During downturns, fiscal pressures may force governments to cut spending on critical development projects, which can have long-term negative effects on societal welfare. For example, post-COVID Australia experienced significant changes in its social welfare expenditure. In the fiscal years 2019-2020 and 2020-2021, there was a marked increase in welfare spending due to pandemic-related economic support measures. However, by 2021-2022, total welfare expenditure decreased by 8.0%. This came as a result of high inflation during a period moving close to a recession.

Policy Implications in Regards to the International Business Cycle:

Managing the impacts of the international business cycle on economic growth and development requires a coordinated approach by policymakers. Some key policy considerations include: