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by Valentino Piana (2015)




1. Summary features
2. Typical pathways in key economic areas
3. Key events
4. Winners and losers
5. Influence on election outcomes
  6. Risks of countervailing developments  
  7. Transition to the next phase  

8. Empirical examples of a booming phase in the business cycle


Summary features

Strong growth in GDP and in remuneration of labour, land and other assets. Frenzy investment in new sectors. Because of full employment, the balance of power shifts towards labour, which achieves monetary and non-monetary advantages, including in legislation.

Typical pathways in key economic areas

Domestic business dynamics

A very high correlation in positive performance indicators across all sectors, with several new sectors in extraordinary growth. Total profits are at all-time highs and many investment projects go into operations.

A booming economy induce hyperbolic expectations and bold plans by existing and new firms, with high entry rates in markets.

Foreign trade

Fast rise of imports tend to lead to large trade deficits. Important leakages to foreign partners might help them growing faster, which can reverberate into their imports for this country, with prosperity cross-borger sharing.

Optimism and confidence in own competitiveness convey a positive frame on commercial negotiation for trade liberalisation and new agreements can be signed.

In countries dependent on the exports of one or few key products, boom can be due to the lucky coincidence of high production and high prices for all (or most) of them.

Highly successful domestic companies may decide to go installing new production facilities abroad as FDI.

Labour market

A tight labour market sinks the unemployment rate, with full employment for most sub-markets (occupations, skills, regional markets). Even discriminated and second-choice people get job opportunities, with a disproportionate positive effects on their income, self-esteem, human capital and social integration, including access to material and immaterial goods (e.g. housing in good locations). Minorities enjoy relief from stereotypes and discrimination.

Wage rise overall, with exceptionally high increases for certain jobs attracting talents and generating shortage in already tight other sub-markets. Immigration, if legally possible and even if not, is on the rise.

If employers resist to labour requests, a wave of strikes can shake otherwise profitable industries, inflicting high costs to firms, which usually accept some increase and improved labour conditions. These tensions may reverberate in political fields, with new legislation protecting workplaces, freedom to organize and strike, limiting hours of daily work.

Public finance

Tax revenue is very high; depending on political orientation by current government, this can relax or tighten fiscal responsibility. Some governments lash out on ambitious public investment plans (including for government buildings, social premises, and symbols of national proudness).

Financial markets

A booming economy is normally coupled with and even psychologically dominated by extraordinarily high levels of euphoric stock exchange indexes, including fabulous returns on many individual shares. This attracts even unexperienced investors, to the worry of many seasoned investors, whose looming forecasts are repeatedly defeated and lose credibility at the eyes of the crowds.

Many financial and non-financial assets (such as land, gold, untraditional assets and others) are frantically exchanged in a upward spyrals, including by people betting on ever - increasing values, often supported by loans and credit. The high price of assets used as collateral for loans make banks and other financial institutions give leeway to even short-sighted, risky and doubtful investments.

Interest rates increases do not discourage hyper-optimistic systems of investors and creditors, but rather make more profitable the push by banks to their clients.

Price level and real interest rates

Inflation levels grow, more or less quickly depending on wage dynamics, previous inflation history, large private and public demand, including hectic investment. Non-renewable assets reach sky high prices.

The central bank has seen its earlier signals ignored, both in terms of interest rate increases and administrative rules for braking investment. Government may ask for continuation of the boom and see the attempt to tame overheated economy as damaging. Depending on the degree of independence of the central bank and its interpretation of the few negative indicators, it can have a very tight increase of interest rates, leading to currency appreciation and even larger trade deficit.

Key events

"We hire" signs are everywhere. The press has plenty of reports of most unlikely people making success. Trade liberalisation processes, however lengthy and related to international cycles, can more easily get momentum during euphoric booming phases. Frenzy bets on new things are common.

National pride can be spurred by announcements regarding e.g. space missions, Olympic games, international expo, etc. although their actual performance can happen in dramatically different business phase. Corporate pride can deliver the tallest skyscrapers in town, country or even the world.

Winners and losers

Social groups with historically much larger unemployment rate than the general average get the largest drop during booming phase. Full employment is particularly important for women, the young, immigrants and ethnic minorities. The active labour force and the employees get more diverse, what usually reduces social barriers.

Wage earners in general are among the winners, but there are also suprisingly large number of people making capital gains on shares through booming stock exchanges.

Fixed income earners are sensitive to inflation levels, so they may be (more or less) hurt. Profitability (in percentage) can also be lower than in recovery.

Influence on election outcomes

When the economy is at the centre of voters' information and decisionmaking, elections in the booming phase of the business cycle strongly favour the current government.

The opposition will try to divert attention away from economic arguments or narrowly frame specific events or indicators that are worsening.

Risks of countervailing developments

Euphoria can easily pass from justified to irrational and reality is bound to fail excessive expectations. Higher than expected costs (e.g. wages, land and interest rates), coupled with sales that, although on the rise, do not keep pace with over-evaluation of total market and own market shares, can translate into "distributed profits" that do not justify the overshooted share prices in the exchange.

Political groups sensitive to industry arguments may feel that labour is getting too strong, obtaining too much from the government, and put in motion policies to restrain growth, including by loudly asking the (purportedly independent) central bank to raise interest rates to brake "overheated" economy.

Bottlenecks to high general growth may occur in specific industries, by shortages in power generation, over-use of transport infrastructure, insufficient supply of specific goods.

Trade deficit, public deficit and inflation are three possible black spots on the overall very good shape of the economy.

Environmental contamination and pollution, high emissions of toxic and GHG gases can be the effect of a booming extraction and (certain type of) manufacturing industries, if environmental dumping and lax legal regulations were chosen to attract FDI and internal investments.

Transition to the next phase

A crash in stock exchange and in general a failure in achieving the overly optimistic expectation of sales and income by firms and household respectively can abrupt put an end to booming periods. The materialisation of a number of potential menaces can lead to policymakers' over-reaction, instead of more specific and targeted approaches.

Sustaining boom for longer periods require elastic and effective fine tuning, by removing obstacles and tackling challenges from domestic and external forces.

If over the next phases their achievements are not wiped out, booming phases have a lasting effects on legislation and social integration of disadvantaged social groups.

Empirical examples of a booming phase in the business cycle

* Austria in 1988: rivised upwards for four time over the year, GDP is growing by 4%, thanks both to exports (+7.7%) and domestic demand. Tax cuts are increasing disposable income and consumption (+3.5%). The perspective of joining the European Union (at the time called "European Economic Community") is debated, with most political forces agreeing on it.

* Iceland 2006: GDP growth at 5%, boosted by extremely positive expectations, including those linked to a huge new dam to generate electricity required by a new aluminium global-scale plant and even to a transition to "hydrogen-based economy". Full employment is attracting foreing workers, with a rising xenophobic party in the polls. Inflation is high (7.1%), tackled by a very high nominal (and real) level of interest rates (14%). Such high rates and the liberalisation of capital flows are attracting a lot of foreign funds.


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