How job losses can occur during trade cycles
This week, we will look at how job losses can easily occur during trade cycles. In most countries, output, productivity, employment and living standards have all shown an upward trend over a long period of time. However, in the short- term, they may rise and fall, or fluctuate. Such shortterm fluctuations are commonly known as trade cycles, or business cycles. Each cycle may last from two to ten years.
Let us see what happens during a trade cycle which consists of a peak and trough. A trough is the bottom of the cycle and is characterised by a high level of unemployment which, in turn, results in low demand by consumers for goods and services. Therefore, businesses will produce fewer goods and hence profits will be low. And so, businesses may be unwilling to take risks in making new investments or expanding their businesses.
But at some point, whether it be after a few years or longer, a recovery in the economy will take place. A recovery may be set off in many ways; for example, a rise in commodity prices, government interventions, higher stock market prices… Businesses may now expand production resulting in reduced levels of unemployment and increased consumer demand which, in turn, will lead to a surge in consumer spending. Investments that were once considered risky may now be undertaken. The peak is the top of the cycle, and due to expansion of businesses labour shortages may now begin to occur, especially in certain key skill categories. Also, raw materials may be in short supply. Output can only be raised further by new investment. However, there may now be a shortage of investment funds. And input costs and product prices will rise due to high levels of demand; hence this will cause the rate of inflation to rise.
But this state of affairs will not last forever! All good things have to come to an end sometime and a downturn in the economy may now occur. One reason for this might be that high commodity prices will now make necessities such as transportation, food, household goods and rentals costlier thus reducing consumer demand and spending on non- essential goods like diamonds. As a result, production by businesses will fall and levels of unemployment will rise, especially amongst low- skilled, low- educated workers and the youth. As unemployment rises, households’ incomes will plummet causing demand to fall further leading to a fall in prices, and, therefore, more and more businesses may now get into financial difficulties and make losses. New investments that before looked profitable will now appear unprofitable and so will be abandoned. Furthermore, a country’s Gross Domestic Product – a monetary measure of the value of all the final goods and services produced in a given time period – will also contract. Now if the economic downturn is especially severe causing a sustained contraction of the economy, then it is called a recession. The recession ends in the trough and a new cycle will begin.
And many recessions are global in their extent and may be caused by factors that we, in Botswana, may have no control over. A downturn in the economies of European nations and the USA can so easily affect economies in the developing world such as ours. Such a downturn may be the result of a financial crisis as in the case of the 2008/ 09 recession which began in the USA. Since we live in a global village these days, anything that happens elsewhere in the world may affect Botswana also – as they say, when America sneezes, the rest of the world catches a cold! The 2020/ 21 recession was a result of the COVID- 19 pandemic, which allegedly began in China. The pandemic was accompanied by national lockdowns worldwide which have thrown millions of people out of work as businesses trimmed down their operations in order to reduce losses.
Many economists believe that trade