Economic cycles: why conditions change together

For the members of the Financial Market Club, FSJES

Employment, output, credit and interest rates do not move independently. When one improves, the others usually follow. Mishkin defines business cycles as the upward and downward movement of aggregate output. A recession is a period of declining aggregate output.

One mechanism, many effects#

Mishkin's supply and demand model of the bond market shows how the pieces connect. Bonds are claims that firms sell to raise money and savers buy with their wealth. In an expansion, income and wealth rise, so demand for bonds shifts right. Businesses also find more profitable projects and want to borrow, so the supply of bonds shifts right too. In a recession, income and wealth fall and demand shifts left. Output, jobs and financial prices are linked through the same decisions.

Morocco in 2015 and 2016#

Al Maliya gives a clear case. Growth was 2.6% in 2014 and 4.5% in 2015. For 2016, the magazine expected a slowdown because of the cereal harvest. The estimate was 33.5 million quintals, the lowest since the launch of the Plan Maroc Vert, and agricultural GDP was expected to fall about 7.3%. Other farm products, especially olive production (up 25%), softened the blow.

Non-agricultural activity looked better in the first quarter of 2016: cement sales rose 5.9%, electricity output rose 3.5%, and phosphate output rose 10.2%. The labour market was weaker. The economy lost 13,000 jobs between the first quarters of 2015 and 2016, and unemployment reached 10%, against 9.9% a year earlier. Agriculture, forestry and fishing lost 15,000 jobs.

This demonstrates a key principle of cycles: sectors do not move in perfect unison, but they are tied together through national income. A poor harvest cuts rural earnings, and rural earnings feed into demand for consumer goods, construction, and banking services across Casablanca and other urban centres.

What causes cycles?#

Mishkin presents the monetary view: the growth rate of money has declined before every recession since the early twentieth century. He then adds the objections. The timing could reflect reverse causation, with the cycle driving the money supply. Real business cycle theorists argue that shocks to technology, resources, and tastes, not money, are the main driver. Mishkin's reading is that the historical evidence on exogenous drops in money growth supports the view that money matters, though it is not all that matters.

For a Moroccan economy, agricultural harvest volatility and global commodity swings (oil imports and phosphate exports) provide classical examples of real exogenous shocks driving cyclical growth alongside monetary policy.

The four phases and sector rotation#

Economists structure the business cycle into four distinct, recurring phases:

  1. Expansion: Output expands, corporate profitability surges, and credit demand rises. On the Bourse de Casablanca, cyclical equities (real estate developers, construction materials, capital goods) tend to lead index gains.
  2. Peak: Capacity constraints appear, wage and input inflation accelerate, and central banks tighten monetary policy. Bond yields reach cycle highs.
  3. Contraction: Economic output slows, consumer spending softens, and default rates rise. Earnings across capital-intensive firms decline sharply.
  4. Trough: Activity hits bottom, excess inventories clear, and Bank Al-Maghrib lowers interest rates to stimulate investment, setting the stage for the next expansion.

Understanding where the national economy sits along this four-phase sequence enables portfolio managers to rotate capital from cyclical producers into defensive dividend payers before economic growth decelerates.

For discussion#

  1. Which of Morocco's first-quarter 2016 indicators were leading a slowdown, and which were lagging? Does Al Maliya give enough information to decide?
  2. If money growth falls before recessions, can you conclude that falling money growth causes recessions? Use Mishkin's two objections.
  3. How should a portfolio manager on the Bourse de Casablanca position across cyclical stocks (like cement producer LafargeHolcim) versus defensive stocks (like telecom operator Maroc Telecom) as economic indicators signal a cyclical peak?

For the members of the Financial Market Club, FSJES. Moroccan figures describe 2015 and early 2016, so check current numbers before citing them.

Sources: Mishkin, The Economics of Money, Banking, and Financial Markets, 7th ed., chapter 1 (business cycles), chapter 5 (expansions and the bond market) and chapter 26 (money and cycles, real business cycle theory). Al Maliya n°60, June 2016, section "Reperes" (Moroccan growth, harvest, jobs, first quarter of 2016).