Adeola Adeyemo
In September 2017, the National Bureau of Statistics (NBS) gave Nigerians the news they had been longing for: Nigeria is out of recession. After five consecutive quarters of negative GDP growth that started in Q1 2016, Nigeria’s economy grew by 0.55% in Q2 2017. The GDP at -0.52 percent, is 0.15 percent higher than the rate recorded in the comparable period of 2016 at -0.67 percent and higher by 1.21 percent points from the rate recorded in the preceding quarter at -1.73 percent.
Although economic downturns are a recurring phenomenon, the most recent recession was exceptional in its duration and depth. Nigeria slipped into its first recession after more than two decades, plunging the economy into a serious crisis, leaving Nigerian households with a huge debt overhang and the economy with a large gap in output and employment. Unemployment rates skyrocketed, housing prices and stock portfolios plummeted, and the lives of millions were disrupted.
The situation came about largely due to the persistently low crude oil prices. Crude oil sales account for 70 percent of government income and 90 percent of export earnings. Nigeria got dealt a heavy blow by the collapse of oil prices from the highs of about $112 a barrel in 2014 to less than $50. The oil price crisis plunged the country’s revenue to a record low and affected the general spending and consumption with the attendant shortage of foreign exchange.
When a recession happens, the most significant vulnerable countries will be the exporters of manufactured products and industrial commodities, particularly oil. The Nigerian economy felt this hit in a very bad way. Price of oil is subject to market forces rather than any concerted action by oil exporters. Historically, as oil prices fell, industrial production increased. That is no longer the case because the problem now is finding customers at any price, not keeping production costs low. Lower oil prices might solve a few problems for exporters of manufactured goods, but they create massive problems for oil exporters.
In the wake of the oil price drop over the past few years, investments in energy exploration and production fell sharply. Exxon’s capital expenditures in the first quarter of 2017 were at their lowest level since the first quarter of 2005, and that’s in nominal dollars. In real dollars, you’d have to go back further than that. Less investment now will eventually mean lower production in the future and tighter supply.
There is little debate that the worldwide economy is stagnating, and despite what some would like to argue, Nigeria has not been immune from this slowdown at all.
But who should take the credit for digging us out of the recession and what lessons have we learned? Let’s take a look.
Positive and Negative outcomes of a recession
It’s certainly better for economic activity to be increasing rather than decreasing, but the focus on whether the economy was in recession or not can miss a lot.
The official technical definition of a recession is two consecutive quarters during which economic growth is negative. The economic growth of a country is measured by its Gross Domestic Product (GDP), which is the combined value of things like manufacturing, employment, real income and the balance of trade in and out of the country. As such, recessions are an integral part of the business cycle and essentially unavoidable.
Very often, even the bad news of a recession has been tinged with the good: People are saving more, and consumers have cut back the use of bank loans for business financing. Both trends are good for individuals’ long-term financial well-being, but not so good for the Nigerian economy as a whole: Lower consumer spending means fewer customers for companies, fewer jobs for workers. Moreover, the gradual but steady decline in the official unemployment rate masks several related phenomena that signal continued weakness in the labor market.
But just as the economic cycle affects banks’ lending standards, those lending standards affect how entrepreneurs behave. In boom times, entrepreneurs can borrow money quickly. Here’s where the length of the boom matters: after a short boom, the entrepreneurs seeking to borrow money are still relatively strong. But the longer an economy booms, the more banks see weaker entrepreneurs looking for credit. And when a long boom ends, the pool of prospective borrowers is full of those weaker entrepreneurs. When a recession hits, entrepreneurs may be temporarily unable to borrow.
How a Recession affects Businesses
The dynamics of the downturn has enlarged the gap between successful and less successful business models and fostered shakeouts of the latter. Furthermore, the occurrence of new business models has accelerated.
Economic analysts would argue that recession is actually a good thing. Economies need recessions to take a breather every few years, as well. Growth can’t continue uninterrupted forever. Although they’re painful, recessions are needed to weed out the strong companies from the weak, as many companies go out of business during the downturns and new ones emerge. While they’re painful in the short-term, if you have the guts and capital to make purchases, recessions can offer some of the best buying opportunities in the long-term.
How a Recession affects Individuals
Recessions are unpleasant and hurt some people disproportionately.
While unemployment rates rose to all-time highs, even the employed struggled too. Their average, inflation-adjusted earnings declined significantly. Only a small percentage of workers see their current job as part of a career, while an even larger percentage state that they are not making enough money to live the kind of life that they want to live.
For those who want to make it out of the recession stronger, one key thing to note is that portfolio diversification plays an even larger role than normal. It is wise for investors, even in times of plenty, to have a wide variety of investments included in their portfolio to ensure them no matter which way the economy turns.
Laudable Efforts of the Government
Nigeria’s path out of recession is lined with commendable efforts in improving the ease of doing business through the Presidential Enabling Business Council (PEBEC). Chaired by the Vice President Yemi Osinbajo, the Council implemented a 60-day National Action Plan on Ease of Doing Business and was able to tackle some of the critical bottlenecks and bureaucratic constraints that had hitherto defined the ordeal of doing business in Nigeria. Collectively, the Economic Recovery and Growth Plan (ERGP) agenda, foreign exchange interventions by CBN, and the PEBEC are expected to improve the Nigerian business environment in the next quarter.
Meanwhile, the non-oil GDP grew by 0.72 percent to record the best performance in four quarters, when compared to -0.33 per cent in Q4 2016 and -0.18 per cent in Q1 2016, as NBS attributed the sector’s growth to activities in the Agriculture Sector (Crop Production), Information and Communication, Manufacturing, Transportation and Other Services.
What next after the recession?
While the technical definition of a recession is two consecutive quarters of negative GDP growth, it is a little more complex than that. A recession has leading and lagging indicators. Some results of a recession take longer to become apparent as companies take some time to fully appreciate the changing environment and react. A meaningful rebound in Nigerian economic activity is now underway, and we expect growth to exceed potential over the next few quarters.
In reality, the recession persists for the economically disadvantaged demographics of Nigeria’s 190 million population. It might take a few years, but the saving rate is expected to rise much higher than it was at the end of the previous expansion. And workers are just starting to see signs of a pick-up in wage growth. Hence, the effects of long-term unemployment in reemployment rates may be concentrated among younger workers but maybe less devastating for the economy as a whole.
For the Nigerian economy to move forward, we must understand that each economic and stock market environment is unique. There are no playbooks that will tell you when to get out and when to get back in again. The severity of the next recession will have a lot to do with how things play out in the stock market, but it all depends on how well investors handle it when it finally arrives. The level of panic will rule the day, and that’s not something that can easily be calculated or forecast.
Economists hold the views that the way forward for Nigeria includes reducing the emphasis on oil and re-directing attention to the agriculture and solid minerals sector to retool the economic. Another school of thought opines that experts want the government to cut down on allowances of officers by 80 percent and channel the fund to agriculture to reboot the economy. They also called for the removal of multiple taxation and provision of stable electricity to enable cottage industries to thrive. An increase in the local production of goods is one of the ways to force down per-unit cost
To recover from a recession there needs to be either a rise in Aggregate Demand or a readjustment in prices and wages. Classical economists argue that a recession will only be temporary because labor and product markets are flexible. However, Keynesians argue that wage and price rigidity can keep the economy below full capacity for a long time. For example to regain equilibrium it may be necessary to reduce price and therefore reduce nominal wages by an equivalent amount. However this may be difficult because trade unions will resist cuts in wages, also firms would not be willing to cut wages because it may lead to lower productivity amongst workers.
Nigeria surely needs an intervention. How long the recovery from recession takes largely depends on the scale and success of such intervention and how long it needs to take hold.
This article was published in Maktoub Magazine
