Procyclical and countercyclical

These are terms used to describe the effect of something on the economy. Procyclical means something with a positive effect, while countercyclical means a negative effect. The terms can also be used to refer to a government’s approach to spending and taxes.

Where have you heard of procyclical and countercyclical?

They're often used to describe factors related to the state of the economy. Gross Domestic Product (GDP), which is positively correlated with the state of the economy, is said to be procyclical. A factor with a negative effect on the economy, such as unemployment, is said to be countercyclical.

What you need to know about procyclical and countercyclical.

There are three relationships to the economy that economic indicators can have - procyclic, countercyclic and acyclic, which means the indicator has no relation to the health of the economy. When referring to fiscal policy procyclical means an increase in public spending and a reduction in taxes during an economic boom while reducing spending and increasing taxes when the economy is going through a period of recession. A countercyclical policy would be the opposite - cutting spending and raising taxes during a boom and increasing spending and cutting taxes in a recession.

Find out more about procyclical and countercyclical.

To learn more about the upward and downward movement of GDP, check out our guide to business cycle.