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Investments in Canadian business in the business cycle

Introduction

Over the recent past, many analysts have argued from the opportunity cost models of growth that recessions are the best times when firms should engage in productivity and improving activities due to the temporal substitution.   In this essay, we will look at the characterization of the business cycles; recession and expansion, and the best time to invest in the two cycles. We will closely analyze the implications of the financial cycles to the Canadian economy.

Investing in productivity

A recession is defined as a period of time when there’s an extended period of significant decline in economic activities of a country resulting to even a negative GDP growth. During this time, there is also falling of real incomes, weakening sales and production and faltering confidence by not only consumers but also businesses. On the part of investments, there is a heightened risk aversion by investors thus waiting to see. But again, recessions does lead to recoveries later follow a predictable pattern of behavior. 

We will focus on the importance of investing in productivity in Canada’s economy during recession and expansionary periods focusing especially on some of the elements that have or will greatly contribute to the productivity growth in Canada. Productivity is crucial as it helps to measure each unit of input and the resultant output from that input. The reason why productivity is important is that its measures will tell how much output has been produced from using tangible and intangible inputs. The tangible inputs include skilled workers and capital equipments while intangible inputs include technological advances as well as entrepreneurial and managerial know-how. By finding new and more efficient ways to use these inputs, then productivity will increase over time (Claessens S., Kose A. and Torrones M. 2008).

During the recent financial turmoil in the US, it led to decline in house prices which later turned into a credit crunch with big losses in the equity markets. This problem then spread to other countries and Canada was not spared. This then led to a crisis debate on the impact it had on the real economy. These developments led to questions on how the financial sector is linked to the real economy during recession times. And so, how do financial variables and macroeconomic behave during recessions and asset price busts.  Then what is the best time to invest in these two scenarios? We will answer the question by analyzing the between key macro-economical and financial variables in the business cycles in Canada. We will thus analyze implications during recession and during expansionary periods (Claessens S., Kose A. and Torrones M. 2008).

A business cycle as viewed by Keynesian interprets recessions as those periods in which the utilization of productive resources is inefficiency is low. For expansions, they are viewed as time when the level of economic activities of a country approaches its social optimum. This will mean that business cycles will be associated with in a way with variations over time in order to evaluate the efficiency of the average resources allocated (Jenkins P. 2010). 

Canada has experienced a total of three recessions since 1960-2007. We can have a great insight if we describe the macro-economic variables during recessions and compare them with those during expansion periods. The quarterly median decline in output during the recession periods is approximately -0.5% and during expansionary periods is 0.9%. Thus from the above declines, it means that during recession there is a 105% decline in output per quarter as compared to the expansion periods.

Recession dynamics (Claessens S., Kose A. and Torrones M. p20)

During recession, the government can run an expansionary fiscal policy which will help to restore output to normalcy. This will also help put the unemployed people back to work. Recessions more often than not results in decline of international trade. During this time, credit grows but by a small percentage with both house and equity prices contacting greatly during the recession. Due to the volatile nature of equity, their decline and in prices is more than twice that of house prices. For some macro-economic variables, they show signs of a slowdown before the real recession starts. An example in point is residential investments that typically decline before the start of recession. These types of investments often give a negative year changes in the first quarter of a recession.

For the industrial production, they show weakness signs early and often register a big decline before the start of recession. As recession starts to hit, inflation continues to increase sharply and unemployment starts to hit and during the recession onset, inflation rate declines but unemployment rate increases. It is a business fact that during recession that investment is volatile than the output and usually investments decline in most recessions but for consumption it contracts.

These global landscapes have a lot for the Canadian business to learn from. Thus the private sector ought to replace public support as the main driver for a sustained economic growth. Significant restructuring should be done in many of the sectors of the economy. The export sector of Canada has to adapt to a strong Canadian dollar. There is some evidence on the role of fiscal policy being a source of an increasing macro-economic stability. Explanations put forward account to some structural shifts in nature: that is shifting from manufacture of goods to services, better access to financial services and improving in inventory management. 

From Keynesian emphasis of on public works, it is understood that once a cyclical boom is allowed to develop and investment opportunities have been exhausted, there is little that can be done to stimulate the private sector to spend thus compensation is sought by stimulating other sources of investments. In a federal state like Canada, proper planning and timely implementation of projects requires all levels of the government to be involved. During this time, public investment lies in the jurisdiction of municipalities and provinces. Although intergovernmental collaboration in Canada has never been such successful, public works implementation should be insisted as it will be used to reduce expansion. During a boom, demand becomes saturated and stimulants are usually not effective. Residential construction during these times should also be emphasized although not as effective as public works. This will compensate for the usually cyclical fluctuations of business investments.

While addressing executives in Toronto earlier February 2009, the chairman of General Electric Co. said that during recessions, businesses should invest in technology and innovations as their competitive advantage grows. Due to globalization and regulations regulating international businesses, finding and using a technology that utilizes these complexes and market development that will put the Canadian business on a growth path. Research shows that continuing to invest in all sectors of the economy especially in transformational research and innovation will be central to the advancement of Canada’s place in the world markets. Thus clearly, the country’s business needs to do more on research and innovations during recessions to keeps pace with its peers when recession is over and entering the expansion cycle (Carlson D. 2009).

Thus for a country like Canada to go forward, the private sector demand ought to replace public support as the one that drives the Canadian economy. The new international economic order also has many opportunities that these businesses should cash in during the bad times of recessions. There is a strong demand in the world market during recessions and the important issue that faces the Canadian businesses is how to deal with these deals and challenges that are posed during economic downturns. The opportunities are substantial like that of developing innovative products and services while optimizing the global and local mix of activities.  

Much of the research has been devoted to measurements of business cycles and the different approaches that have been proposed by the government. This study is based on the classical definition of business cycle. Thus a cycle is defined as an expansion that occurs in many of the economic activities which is later followed by a recession. A recession starts when the economy reaches its peak and ends when the economy is at its lowest (Jenkins P. 2010).   

Conclusion

The above essay provides a comprehensive analysis of the linkages between the main macro-economic variables and the financial cycles touching especially to the Canadian businesses. Focusing on these behaviors of these variables around recessions and during expansions we can conclude on several issues. A typical recession lasts four quarters and usually is accompanied drop in output of about 2%. We have seen that recessions are associated with housing and credit crunches, whereby residential investments fall sharply during this time.  Therefore the government and businesses should take the right policy measures to mitigate recession.   Direct support should be offered in the housing sector while a mixture of accommodating monetary and fiscal policies should be offered by the government to local businesses to make them competitive in the global market. In conclusion therefore, we could encourage Canadian businesses to invest in productivity during recessions as the economy will most definitely rebound and start growing again.

 

 

 

 

 

 

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