The United States just reported a massive 5% GDP growth rate for 2014 Q3 that has got the economic world jaw dropped. It’s the largest quarterly growth rate since 2003. For a country the size of the US, a 5% boost in GDP growth rate is quite a remarkable feat. But should we as Nigerians be happy about it? I don’t particularly think so and this is why.
GDP – The IMF last week revised Nigeria’s GDP growth rate downwards to 5.5% for 2015. This basically puts at a 0.5% higher future growth rate than the US current 5%. Since investors typically tie GDP growth rate as a sign a positive sign for their investments, a 5% US GDP growth rate vs. 5.5% for Nigeria is a no contest. Most US Investors will rather remain in the US than in Nigeria all things being equal. Or perhaps they will flee to economies that portends higher growth rate.
QE Tapering – Since the financial crisis of 2008 the US has been effectively printing cash to stimulate the economy. This term which they call Quantitative Easing enables the government to buy securities from the market in exchange for cash. That way money is basically created out of thin air and pumped into the financial system. With that money, investors can spend thus stimulating the economy. Many economist believe the QE from the US has helped pushed up global asset prices around the world including emerging markets like Nigeria. Nigerian equities have also benefitted from this with foreign portfolio investors having over 50% share of the equities market locally. In fact the recent spate of sell-offs have been partly attributed to outflow from FPI’s. The US Federal Reserve Chair (their equivalent of the CBN Governor) announced some months back that the US will reduce (taper) bond buying and will finally stop it. Now that the US economy is looking healthy, there is every likelihood that tapering maybe increased at a much faster rate or even stop it sooner that anticipated, thus starving the world of a huge source of capital
Interest Rates– At 5% GDP Growth rate, it is also likely that interest rates will be increased in the US discouraging some investors from investing in emerging markets like Nigeria. Interest rates are near 0% in the US but with another solid quarter of 5% or more GDP for the US, I doubt the rates will remain at 0%. If the rates are increased to even 2%, more Americans will start saving this reducing demand for foreign products or imports.
There are also counter arguments that could make this sort of growth good for the world as well. A higher US consumer spending and confidence could stimulate aggregate demand as Americans feel happy to spend more. If consumption in the US increase there is likelihood that countries with good export potential will enjoy. It remains to see if Nigeria will fall into that bracket.