Working within the business cycle

by Business Case Studies on Monday 22nd November, 2010

Economic activity fluctuates over time. Sometimes there are periods of high economic growth (booms) and other times there are periods of weaker or even negative growth (recessions). This pattern of fluctuations is called the business cycle. Firms can thrive during periods of high economic growth as consumer spending increases. However, to survive an economic downturn, organisations usually need to alter they way they operate and respond to the changing trading conditions.

Just like any other organisation, building societies are affected by changes in the business cycle and they must respond accordingly. The Building Societies Association (BSA) is the trade association that represents the UK's building societies. As building societies do not have shareholders, they can ensure that the actions they take provide the best possible outcomes for their members. For instance, during the recent depressed economic conditions, building societies have worked hard to ensure that members who went into arrears on mortgages were able to retain their own homes.

In the same way that organisations have to respond to a downturn in economic activity, they must also be prepared for expected recovery if they are to maximise benefits. An upturn of the UK economy is expected following news of next year's royal wedding. Tourism, merchandising and broadcasting organisations are likely to benefit most from the royal occasion and, according to some economists, consumer spending generally may lift due to the 'feel-good' factor. This could then lead to a rise in sales of goods which would otherwise have been postponed, such as electronics and home improvement items. With the London 2012 Olympics the following year, the UK economy may well enjoy a significant boost. (BBC, 16 November 2010)

Questions

  1. Draw the business cycle.
  2. Explain the characteristics of a boom.
  3. Analyse the reasons why building societies may react differently from other organisations at different stages of the business cycle.

Answers

1 Draw the business cycle.

The diagram should include boom, recession, trough and recovery

2 Explain the characteristics of a boom.

The characteristics of a boom include:

  • High levels of economic growth
  • Low unemployment
  • Wage rises
  • Increase in demand/consumer spending
  • Greater investment
  • Many new business start-ups
  • Increased inflation.

2 Analyse the reasons why building societies may react differently from other organisations at different stages of the business cycle.

Building societies may react differently from other types of organisations because:

  • Building societies are not driven by profit for shareholders but by the interests of their members.
  • A boom may result in customers saving more in building societies compared with greater spending in other organisations.
  • In order to behave responsibly, building societies have to be cautious about offering mortgages even during boom times. Retail organisations, for example, selling goods to customers, may not need to be so cautious about offering their products for sale. However, they may need to consider the consequences of offering credit terms.

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