The National Bureau of Statistics (NBS) has released its 2016 Q2 GDP report revealing that Growth rate for the quarter contracted by negative 2% compared to the same period in 2015. This follows a 2016 Q1 first quarter GDP contraction of -0.3% confirming that Nigeria is now in a recession.
According to the NBS “in the Second Quarter of 2016, the nation’s Gross Domestic Product (GDP) declined by -2.06% (year-on- year) in real terms. This was lower by 1.70% points from the growth rate of –0.36% recorded in the preceding quarter, and also lower by 4.41% points from the growth rate of 2.35% recorded in the corresponding quarter of 2015. Quarter on quarter, real GDP increased by 0.82%”.
Nigeria also recorded negative GDP growth rates in both the oil and non-oil sectors of the economy.
During the period under review, Oil production was estimated at 1.69million barrels per day (mbpd), 0.42 mil- lion barrels per day lower from production in First Quarter of 2016. Oil production was also lower relative to the corresponding quarter in 2015 by 0.36million barrels per day when output was recorded at 2.05mbpd.
As a result, real growth in the oil sector was negative 17.48% (year-on-year) in the Second Quarter of 2016. Growth declined by 10.68% points and 15.59% points relative to growth in the Second Quarter of 2015 and First Quarter of 2016 respectively. Quarter-on-Quarter, growth also slowed by -19.11%.
The non-oil Sector
Growth in the Non-oil sector was largely driven by the following 7 activities of Agriculture, Information & Communication, Water supply, Arts entertainment and recreation, Professional scientific and technical services, Education and Other Services which all grew positively while the remaining 19 major sectors, many of which are substantially indirectly dependent on the oil sector recorded negative growth. The non-oil sector accordingly, declined by 0.38% in real terms in the Second Quarter of 2016. This growth rate was 0.20% points lower than the First Quarter of 2016 (-0.18%), and 3.84% points lower from the corresponding quarter in 2015 (3.46%) (Figure 3). In real terms, the Non-Oil sector contributed 91.74% to the nation’s GDP, higher from shares recorded in the First Quarter of 2016 (89.71%) and the Second Quarter of 2015 (90.20%).
What this all means?
A recession in both the oil and non-oil sector of the economy means that the pace at which Nigerians produce goods and services has reduced faster than it has ever did in over 2 decades. Since recession means two quarters of negative growth rates, it means that as a country we have failed to grow economically in two straight quarters.
Foreign Investors typically invest in countries with fast growing GDP rates as it means that economic activities in such countries are growing meaning that it is more likely that the grow their investments than lose it as in with a recession. For Nigeria, these investments are badly needed to ensure that our exchange rate remains stable.
Analysts have for weeks predicted that Nigeria was already in a recession considering the state of economic activities around the country. Now that it is confirmed, we should expect to see reactions in all spheres of the economy.
All eyes will firmly be on the Federal Government to come up with a plan that can help jump-start growth in the economy. Pending that, the private sector is expected to react negatively to this release. The magnitude of the recession implies that businesses will cut orders and investments, reduce more jobs and perform other drastic measures they dim fit to remain alive. Those without a buffer will likely close shop or move overseas or outside Nigeria to a West African country where the economy is better.
Government typically react to recessions in either of three ways.
This involved injecting economic stimulus into the country. Government achieves this by pumping in billions of money into the economy spending it on developmental projects that induce job creation. The idea is that since the economy is in a recession and no one is spending, Government, as the final ‘bus-stop’ can be the one doing the spending. Government is able to achieve this because it has the capacity to borrow as much as it can and luxury of time to pay back. Proponents of injecting government stimulus believe that this will create demand for a lot of businesses who are stuck with a choice of closing shop or cutting jobs and orders just to survive. But with government doing the spending, it is believed that the money will soon go round giving businesses the needed lifelines to survive. Stimulus could also include government lending to small businesses at subsidized rates. It is also not uncommon to see massive stimulus with tax increases on the wealthy and in some cases everyone.
The problem with creating jobs via economic stimulus is that it typically includes massive borrowings especially if Government revenues are significantly cut back, like Nigeria is. Massive borrowing on its own can be a problem as it can be expensive (as is the case with Nigeria) and creates large government deficits which future generations of Nigerians may have to pay. In addition to that, government can (as they typically do) waste the money on the wrong initiatives leaving the economy with a double whammy of no jobs and huge debts. Furthermore, stimulus led economic recovery could back fire especially if the negative effects of increasing taxes outweighs the benefits of government spending. There just has to be a final balance for it to work.
No Stimulus but cut spending and taxes.
Another school of thought believes that recessions can be fought by getting the government to cut spending and stop borrowing. Those who believe in this plan, believe that by cutting spending and not borrowing, the government is essentially doing what every typical household would do when they are in a financial mess. Thus, they believe that cutting spending can be complimented with tax cuts which inadvertently means that Nigerians will have more cash in their hands since they pay taxes. The core principle here is that rather than have the government do the stimulus, the government should cut its spending, reduce taxes which intern “puts” cash in the hands of Nigerians who are better placed to invest it.
The problem here however is that in an economy like Nigeria where government is the largest spender, cutting government spending is likely to make things worse as it means that more jobs could be lost and social unrest might arise. Cutting taxes may also be bad as that would mea less revenue for the government to provide essential services required by the poor and elderly. In fact, cutting taxes across board means government will have to sack a lot of civil servant salaries which make up over 80% of Government recurrent expenditures.
Mixture of the two
There is a middle ground also where some Government introduce a mixture of tax cuts and deficit spending to reignite the economy. This method is used by most western economies where their parliament is divided on the two methods referred to above.
The Buhari Led APC Government appeared to have settled for a version of the first option based on the massive N6 trillion budget and spate of borrowings currently taking place. The government has also not announced tax cuts but is in fact looking to increase taxes to raise government revenue. Unfortunately, this could mean spending money on projects that are not creating enough jobs or stimulating the economy.