During the Great Depression of the 1930s, Keynes believed that economic development would inevitably undergo a cyclical movement that started upward, then downward, and then upward again, with obvious regularity, namely the economic cycle.
Keynes believed that investment fluctuations caused by the law of diminishing marginal efficiency of capital were the main reason for the economic cycle. The diminishing marginal efficiency of capital led to the failure of people's expectations of investment returns, which led to an increase in liquidity preference and thus triggered a crisis.
In economics, there has always been controversy about whether the causes of economic cycle fluctuations are endogenous or exogenous, which can also be viewed from both the supply side and the demand side.
According to Say's Law, on the supply side, "supply creates its own demand", and economic fluctuations are caused by population, productivity, inventory cycles, etc.
The Keynesian view that "demand determines supply" is completely the opposite. From the demand side, effective demand falls below potential demand, leading to a recession or depression, with fluctuations caused by factors such as monetary policy, real wages and credit cycles.
In 1912, Schumpeter proposed his economic cycle theory based on the "innovation theory" in "Business Cycles" and related books and periodicals.
Historically, innovation varies greatly, and the impact of innovation on economic development also varies, so cycles are long and short. He combined the views of his predecessors and proposed that there are several cycles in the historical development of capitalism.
There is an argument that these cycles coexist and are intertwined. They are the Kitchin cycle (3 to 4 years) driven by manufacturers' inventory investment, the Juglar cycle (9 to 10 years) driven by equipment replacement and capital investment, the Kuznets cycle (15 to 25 years) driven by the real estate and construction industries, and the Kondratiev cycle (50 to 60 years) driven by technological innovation.
Characteristics of the Juglar cycle
The Juglar cycle is an economic cycle lasting about 10 years proposed by French economist Juglar in 1860. Juglar studied the fluctuations in prices, discount rates and gold reserves in France, Britain and the United States, and found that these were correlated with the cycles of business activity, investment and employment growth.
Later, based on a large amount of evidence, Juglar proposed the idea that crises are cyclical. Prosperity, crisis and depression are three stages of social and economic movement, and the recurrence of these three stages forms a cycle.
The Juglar cycle is the cyclical fluctuation of the overall economy, while the enterprise equipment investment cycle is the investment cycle of enterprises for regular equipment replacement and capital expenditure.
In the Juglar cycle, the scope of investment is broader and is not limited to investment in enterprise equipment renewal. Therefore, it is necessary to comprehensively consider price, credit, investment and interest rate factors to determine whether an economy is in a certain stage of the Juglar cycle.
However, we can understand the changes in the Juglar cycle through the regular cyclical rise and fall of corporate equipment investment. Due to factors such as wear and tear, depreciation, and technological substitution, machinery and equipment often have a certain renewal cycle.
When machinery and equipment begin to be updated in large numbers, fixed asset investment will increase significantly, driving the economy into a period of prosperity. Then, as the equipment update is completed, fixed asset investment will decline and the economic cycle will turn into recession.
The cyclical replacement of equipment drives cyclical changes in fixed asset investment, ultimately resulting in an economic cycle of 9 to 10 years.
Review of the Juglar Cycle
Since the 1970s, the development of economic globalization has led to more and more countries being connected with each other, and this connection is achieved through trade in goods and services, direct investment, indirect investment, financial markets and the spread of technology.
This connection is increasingly manifested through the synergistic characteristics of the economic cycle, and the synchronization of economic cycle fluctuations between countries has increased significantly.
According to the convention of measuring economic cycles using the “valley-peak-valley” method, the world economic fluctuations since the 1970s can be divided into five complete Juglar cycles, with each cycle lasting 7-10 years.
Equipment investment index is the basic signal of Juglar cycle
Since the Juglar cycle mainly refers to the equipment investment cycle, the most basic signal for identifying the Juglar cycle is the indicators related to equipment investment. Generally speaking, we select the growth rate of equipment investment or the proportion of equipment investment to GDP as the basic identification variables of the Juglar cycle.
The Juglar cycles of major economies around the world show strong synchronization. As can be seen from the figure, the world has experienced two Juglar cycles roughly synchronously in this century (2001-2009, 2009 to date).
Since the beginning of this century, due to the increasing degree of trade and financial integration in the world economy leading to economic globalization, the Juglar cycles of major economies have shown a strong degree of synchronization.
We are currently at the point where the second cycle has bottomed out. The second global cycle showed an upward curve from 2009 to 2015. In 2016, the proportion of equipment investment in GDP reached a peak, and the growth rate of equipment investment in various countries began to decline. Although it rebounded in 2017, it fell again after 2018 and has remained so to date.
China has also experienced two rounds of Juglar cycles in this century (2002-2011, 2011 to present). China started the first round of Juglar cycle in 2002, during which China's manufacturing industry rose and became a major manufacturing country. In addition, due to the adjustment of industrial structure, the status of the tertiary industry rose.
In 2010, the proportion of equipment investment in GDP peaked, and the decline in the growth rate of equipment investment increased until the demand for equipment investment bottomed out in 2011, and then the second Juglar cycle began.
In the second Juglar cycle, high-tech industries and modern service industries developed rapidly and the demand for equipment replacement increased, and the proportion of the tertiary industry gradually surpassed that of the secondary industry.
In 2015, the proportion of equipment investment in GDP peaked, and the growth rate of equipment replacement declined. China is currently at the stage where the last Juglar cycle is about to end and a new cycle is about to begin.
Real economic indicators become important signal guides for the Juglar cycle
The Juglar cycle generally refers to the equipment investment cycle, but from a system perspective, it not only involves equipment investment, but also involves multiple variables such as production, investment, consumption, foreign trade, credit, and prices.
Therefore, from the perspective of the entire real economic system, the identification signals of the Juglar cycle can be further expanded.
Economic recovery boosts demand for equipment investment
The GDP growth cycle is consistent with the Juglar cycle. Equipment investment is first linked to economic growth.
The demand for equipment investment is inseparable from the recovery of terminal consumer demand. Consumption is an important driving force for investment growth. With the economic recovery, social consumer demand has increased rapidly, leading to a shortage of supply in the short term. Enterprises have increased investment, updated equipment and expanded production capacity.
Manufacturing investment and industrial chain upgrading and reconstruction usher in a new round of equipment investment cycle
Growth rate of completed fixed asset investment
The Juglar cycle refers to the equipment renewal cycle. When machinery and equipment in production need to be updated, capital expenditure will be generated, thereby relying on fixed asset investment to make the economy prosperous.
When the equipment is updated, fixed asset investment will fall into a trough again, and the economy will go into a downturn. Therefore, the Juglar cycle can be observed by the increase in the amount of fixed asset investment.
Growth rate of manufacturing investment completion
The cyclical signal of manufacturing investment growth is significant. The core of the Jugra cycle is the renewal of enterprise equipment, which is particularly obvious in the manufacturing industry. Therefore, the growth rate of fixed asset investment completion in the manufacturing industry has also become an important signal.
The global Juglar cycle can bring broad market demand to the manufacturing industry. At the beginning of a Juglar cycle, companies need equipment upgrades or technological innovations. Equipment expenditures will be on the rise, and demand for manufacturing products will expand.
Historically, when the global Juglar cycle begins, manufacturing fixed asset investment in major economies around the world rises rapidly year-on-year, and the manufacturing PMI also continues to rise.
After the global manufacturing investment declined in 2001, it rebounded rapidly in 2002. After China joined the WTO in 2001, external demand led to rapid growth in exports and continued growth in manufacturing investment.
During the subprime mortgage crisis in 2008, global manufacturing fixed asset investment and manufacturing PMI fell sharply, and bottomed out and rebounded in 2009. During this period, my country launched a 4 trillion investment plan in November 2008, and the strong growth of domestic demand once again drove a surge in manufacturing investment.
Growth rate of output of major industrial equipment
The output of major industrial equipment represents the willingness to spend capital and shows cyclical characteristics. The output growth rate indicators of industrial boilers, metal cutting machine tools and other equipment investment-related products represent the willingness to spend capital in the manufacturing industry at the micro level. The historical trends of these indicators show the characteristics of the Juglar cycle.
Comparing the cumulative year-on-year changes in monthly output since 1998, the output of major industrial equipment has shown a certain periodicity, with the 2009 financial crisis as the boundary, roughly presenting two cycles of about 10 years.
During the Juglar cycle, the growth rate of equipment investment increases, driving up the demand for upstream commodities. During the Juglar cycle, the growth rate of equipment investment increases, driving up the demand for upstream commodities. Since companies need to sign orders in advance, the start of commodity price increases often precedes the Juglar cycle.
After the Juglar cycle begins, commodity prices will continue to rise due to the positive correlation between commodity prices and inflation, among which metals, industrial raw materials, and industrial products are closely related to corporate investment.
Given that the futures market has a more acute price discovery function and the index is published daily, it is also more leading than PPI and CPI as an indicator of inflation.