A look at economic cycles

The economics discipline involves studying economic or business cycles. An economic cycle is defined as the fluctuation of the economy between periods of expansion (growth) and contraction (recessions).

It is usually measured with the Gross Domestic Product (GDP) of a country. Generally, an economic cycle goes through four stages; (i) Expansion; (ii) Peak; (iii) Contraction and (iv) Trough. 

Once the cycle is complete, it continues from the start again. There is no definite rule that exists in determining how long each phase lasts. In fact, expansion phases can last many years before hitting a peak. 

However, a healthy economy will always go through a contraction phase occasionally. During the expansion phase, an economy will experience strong growth and interest rates will generally be lower but will begin to increase as the expansion matures. 

The overall production level increases and inflation rates begin to rise as the expansion matures.

The peak is reached when the growth of an economy reaches a plateau or maximum rate.

It is usually characterised by higher inflation that needs to be corrected. The correction then occurs through the contraction phase, wherein the growth of the economy slows, unemployment rates rise, and inflation tapers off.

It continues until the cycle reaches a trough. The trough is characterised as a low point in the economy from which it can re-enter an expansionary phase.

Looking at the Zimbabwean economy, we note that the country has experienced recessions in 2019 and 2020, with GDP estimated to have contracted by 6% and 4.1%, respectively (Ministry of Finance Estimate). 

The economic contraction has been a result of output losses in key sectors such as agriculture, mining, manufacturing and tourism. The Government of Zimbabwe estimates that the economy will rebound by 7.4% in 2021 on the back of recovery in agriculture. 

That said, the big question has always been whether the 7.4% growth estimate is realistic and if we should expect a V-shaped economic recovery in 2021. 

The 2019 and 2020 recession also signifies the importance of base effects – namely the tendency for growth to be stronger when the starting level of GDP is unusually depressed. In the depth of the crisis, many doubts were expressed about the capacity of economic activity to revert quickly back towards pre-pandemic levels after lockdown restrictions were eased. 

While a low-base effect points to an economic rebound of some sort in 2021, there are also lessons to be taken from Isaac Newton’s first law of motion. It states that if a body is at rest or moving at a constant speed in a straight line, it will remain at rest or keep moving in a straight line at constant speed unless it is acted upon by a force. 

This is also known as the law of inertia. This means that if the Zimbabwean economy was on a free fall in 2019 and 2020, then there should be an external force that is required to change the trajectory. It would therefore make sense for economists to look for triggers or factors that can change the direction of the cycle. 

In our view, key triggers could include (i) rapid Covid-19 vaccination programmes across the world leading to a return to normalcy, (ii) a surge in foreign direct investment and export receipts, (iii) liquidity injections (forex) in the economy, (iv) speedy recovery of international tourist arrivals and (v) changes in international relations (removal of economic sanctions).  

As Morgan & Co Research, we have identified 3 sectors to watch in 2021: Agriculture, Mining and Financial Services.

We also maintain that investors on our market should seek exposure in companies that have defensive business models, cash-generative and export-oriented.

Batanai Matsika is the Head of Research at Morgan & Co, and Founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor.com

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