Peak Phase

In the previous chapter, we briefly discussed the economic cycle's expansion phase.

Now, moving ahead to another phase of the economic cycle, the peak phase.

As the name suggests, the peak phase is the highest point in the economic cycle, characterized by maximum output, employment, and often, inflation. It's the end of a period of economic expansion.

Expansion is characterized by increasing growth, while the peak phase indicates the point at which growth reaches its maximum capacity. This is in contrast to the contraction and trough phases, during which the economy slows down and eventually begins to recover.

Indicators of the peak phase:

• Economic Growth: The economy's Gross Domestic Product (GDP) has reached its peak level and might now be showing signs of stabilizing or slowing down.

• Unemployment Rate: During the peak phase, usually unemployment is at its lowest, with the majority of people who want jobs being employed.

• Consumer confidence and spending: Consumer confidence is currently high, leading to strong and consistent spending. This increase in consumer spending is pivotal in driving overall economic growth.

• Inflation and interest rates: As demand is more than supply, inflation rates may increase. To manage inflation, central banks like the Reserve Bank of India could opt to raise interest rates.

• Stock market performance: High stock market valuations frequently occur due to strong corporate earnings and positive investor sentiment.

Causes of the Peak Phase:

• Demand outstripping supply: When the demand of consumers and businesses is more than the capacity of the economy to meet that demand, it results in a peak of economic activity. In simpler words, when demand is more than supply it results in a peak of economic activity.

• Consumer and business spending: The economy experiences an increase in consumer and business spending, with both sectors making significant investments due to their confidence in the stability and growth of the economy.

• Saturation of the market: The saturation of the market occurs when a large portion of consumers have already bought durable goods, causing a decrease in new demand and a slowdown in market activity.

• Monetary policy measures by central banks: Central banks may opt to increase interest rates, to avoid the economy from becoming too overheated, , which can result in a decrease in investment and spending.