COVID-19 has had a major effect on the global economy, which is now stuck between uncertainty and a self-induced fall in demand, creating a drag on economic output and productivity.
Is Nigeria in a recession?
Right now, economic activities in Nigeria have ground to a halt, so the economy has slowed down. A slowdown is defined as a “deceleration of the economy.” Nigeria’s economic slowdown may last for a month or more. Meanwhile, economic growth rate may remain positive, even growing, but anemic.
Once economic growth stops, turns negative, and stays negative for 6 months (two quarters), the economy is in a recession. So, a slowdown is still a positive but slowing growth, while a recession is negative growth of at least two quarters. What about an economic depression? An economic depression is a longer and more severe recession, with GDP falling by a minimum of 10% into negative territory.
The business cycle also goes through four major phases: expansion, peak, contraction, and trough. All businesses and economies go through this cycle, though the length varies. Recessions happen or start to show when the economy starts to contract and falls into a trough. It is thus important as an investor to understand business and economic cycles, which as such aid effective planning.
The Central Bank of Nigeria (CBN) helps manage the economic cycle with monetary policy; it lowers interest rates to aid an end to a contraction or trough. That is called an expansionary monetary policy. The Central Bank can also raise rates to manage expansion, so it does not overheat. That is a contractionary monetary policy. The Executive may use fiscal policy as well.
If an investor forecasts that an economic contraction is imminent, this means that the Central Bank may drop rates, the investor can take a position in the financial markets to either protect a position of benefit from a fall in rates. Similarly, if the investors forecast that the economy will experience a boom and expand, meaning the likelihood of a Central Bank (CBN) interest rate hike is elevated, another set of positions can be taken to profit from rising interest rates.
To simplify this, knowledge about the future direction of the economy is key in a portfolio planning and asset allocation. Consumer confidence plays a role in managing the economy and the current phase in the cycle.
So how can an economic forecast be done?
Well not by guesswork. I always look at the Purchasing Managers Index (PMI) as a guide. The PMI is an index of the prevailing direction of economic trends in the manufacturing and service sectors. According to Investopedia, the PMI “summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting. If purchasing managers are buying more raw materials and delivery trucks, that can be interpreted as the economy in growth.
I reference the Central Bank of Nigeria’s (CBN) PMI index as my guide; generally, a composite PMI above 50 points indicates that the manufacturing/non-manufacturing economy is generally expanding. 50 points indicate no change and below 50 points indicates that it is generally contracting. The latest CBN Manufacturing PMI reading is for March 2020, and it does not look good. We summarize as below:
The Manufacturing PMI in the month of March 2020 stood at 51.1 index points. The index grew at a slower rate when compared to the index in February 2020 at 58. Drilling down to the manufacturing subsectors index for 2020, the narrative continues.
Inventories: contracted to 49.4 points.
Production grew at 54.4 albeit slower than February.
New orders index grew 52.3, again slower than February.
Manufacturing supplier delivery time contracted at 49.4.
Employment level index contracted at 47.1 points.
All key subsectors saw declines from February 2020, with employment, inventories and supplier deliveries posting negative figures.
Whilst no single data point, especially in economics, is ever conclusive, this fall in Manufacturing PMI does indicate a significant economic slowdown, especially looking at the employment level which fell for the first time after recorded growth for thirty-four consecutive months
Clearly, the economy has slowed and may enter a recession. The question is for how long?
Will the Oil markets miss Donald Trump?
As Donald Trump prepares to vacate office, what will be the fate of the oil market and the several arrangements the US has put in place with OPEC+?
OPEC will miss Trump, its ‘companion’, and would be careful about strains under Biden.
Some OPEC members are worried that strains in the OPEC+ union could reappear with the administration of the newly elected US President, Joe Biden, as the outgoing President Donald Trump went from criticizing the ‘cartel’ to aiding and abetting, in order to achieve a record oil yield cut.
Biden could examine political relations with three members from OPEC – Saudi Arabia, Iran and Venezuela, just as with key non-OPEC member, Russia.
Severe US sanctions on Iran and Venezuela has kept large number of barrels of oil free, every day in the market, and if Biden loosens up measures on the sanctions in the nearest future, it will lead to increased supply in the market.
In some of his statements, Biden said he would lean towards multilateral discretion to the one-sided sanctions Trump has forced, even though that may not necessarily mean removing any sanctions any time soon. In his mission, Biden said he would revisit Iran’s 2015 atomic arrangement if the leaders keep their part of the bargain.
Trump quit the agreement in 2018, reemploying sanctions that cut Iran’s oil trades. Some in OPEC dread that the arrival of Iranian volumes will add to oversupply, without reductions somewhere else and stress over Moscow’s proceeds, with investment in OPEC+.
“Iran sanctions can be re-evaluated and then Iran will be back to the market, so again there would be oversupply and the current cut deal will be at risk,” an OPEC source said before the result of the political decision was known.
There are also fears Russia would leave OPEC+, as their ally leaves the White House. “There is the danger of Russia leaving the OPEC+ bargains too, which implies a breakdown of the arrangement, as it was Trump who welcomed Moscow,” the source said.
Biden has named Russia as Washington’s most genuine worldwide danger. In his campaign, he additionally vowed to rethink relations with Saudi Arabia.
In contrast, Trump liaised with Saudi Arabia and Russia to end a fiasco that brought oil prices down. The outcome was a record global arrangement to cut oil to around 20 million bpd or around 20%. OPEC+ alone consented to cut 9.7 million bpd.
Trump connected more with the oil markets, regularly taking to Twitter to comment on supply and the American energy industry. Biden is viewed as bound to avoid meddling in OPEC matters as much as possible. He would depend more on advisers and not micromanage as Trump usually did.
“Biden would not have the comfortable relations with Putin that Trump seems to have,” said Chakib Khelil, a previous OPEC President.
Trump built up a good relationship with top OPEC producer, Saudi Arabia’s ruler Mohammed Salman, who depends on the United States for weapons and security against territorial opponents.
Although, there were certain times Trump tried to bully OPEC+ into bringing prices down, as it was affecting gasoline prices in America; his continuous support for Shale oil also affected OPEC’s dominance in influencing and managing global oil supply. It is highly improbable that Joe Biden would make that type of interference.
Furthermore, it is highly unlikely that Iranian oil would get sanctions lifted quickly. Hence, this means OPEC+ individuals would have a sufficiently long time to change their arrangement to prepare for more Iranian oil.
Effects of the recession on families and how to cope
For families, it will require a lot of sacrifice, adjustments and prudence in the management of resources to navigate the economic storm.
The National Bureau of Economic Research defined a recession as a significant decline in economic activities spread across sectors, lasting more than a month, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale/retail sales.
According to the just-released data by the National Bureau of Statistics, Nigeria’s Gross Domestic Product (GDP) declined by -3.62% (year-on-year) in Q3 2020, thereby marking a full-blown recession and second consecutive contraction from -6.10% recorded in the previous quarter (Q2 2020).
The year 2020 has been a trying time, not only for Nigerians but for the world generally; this is as a result of the novel coronavirus, which has impacted the economy negatively.
The Nigerian economy over the years has been striving to be stable because of the mismanagement of funds, high debt rate and unemployment, etc. However, the recent recession compounded Nigeria’s socio-economic challenges caused by the COVID-19 Pandemic and Post #Endsars Violence.
Furthermore, to curb the spread of the pandemic, a lockdown was imposed nationwide, during the period of March to August 2020 and a lot of families found it challenging to survive the impact of disruptions to daily commercial activities.
Some had to dip into their savings to remain stable during that period. Jobs were lost as some companies could not afford to pay salaries, while some companies had chosen salary reduction as a way of sustaining their businesses.
Prices of goods and services also increased astronomically during this period. On the other hand, economic activities, religious and social gatherings were limited to contain the pandemic across the nation and the negative effects on the economy.
The following are the major causes of recession in any given economy as drawn from the past Nigeria economic recessions:
- A general rise in price of goods and service which leads to low purchasing power.
- Increase of debt, especially foreign debts.
- High-interest rates discouraging investors
- Importation bans in Nigeria which increased poverty rate in Nigeria.
- Mass unemployment and general loss of confidence in the government due to the challenging economic indices.
In a recession, families with little or no barriers to resist the effect of recession are most likely to be hit severely. Though there are some families who may not be able to avoid the effects of the recession, they can make changes that can improve their situations and help them prepare for the future, while they wait for an economic upswing,
Nigeria’s Q3,2020 Recession, below are the implications on families and households
- Rising food inflation of over 17% will impact the cost of food prices as the festive season beckons.
- Purchasing power parity of Nigerian households is challenged due to the economic situation.
- Marital issues crop up, as financial pressures can damage mental health which can lead to depression and frustration in marriages.
- The low-interest yield environment in the Nigerian capital market also affects appetite for savings in the fixed income market.
The unfortunate condition could be managed by families with these measures:
- Families are advised to cut down costs ruthlessly, especially in this festive period. Have a reasonable festive celebration.
- They should have a budget/financial plan put in place for the year 2021 as no one knows how things will unfold.
- There is a need to have another stream of income or work overtime to sustain your family during this period and this can be achieved if you are skillful.
- It is also advisable to purchase all you need for the festive season now, as prices of goods and services might triple because of the festive period.
- It is crucial for some families to switch to cheaper schools around with the same qualities and standards to reduce expenses.
- FMCGs are already tailoring the sachet-economy to the lower-class families whose earnings have dropped this year.
- Households experiencing financial difficulties during this period are advised to position themselves to see how they can benefit from the various interventions from the Government for citizens.
- Couples should have conversations around their finances and prioritize expenses while adapting to the new economic realities and coping with necessary adjustments
What Government can do to enhance the economy
- Tax rates should be reduced on individuals, corporation, and small businesses. This high tax rate is affecting many small-scale businesses. Foreign investors will also be encouraged by the reduction in tax rate. This will increase inflow of dollars to Nigeria’s economy, and ultimately increase investment and standard of living. It will solve the problem of high exchange rate.
- It is important for the government to curtail any unnecessary expenditure and focus more on expanding her export earnings and production through wise investment. Putting funds into the economy is a good idea, but there is need for diversification, allowing the free flow of naira and stabilizing the oil sector, modernizing agricultural sector. By this, Nigeria can spend her way out of recession wisely.
- Enhanced Access to Credit: Here, the Nigerian government, especially the federal and the state government, should grant soft loans to small and medium scale enterprises, to enable them boost gross domestic product (GDP) of the country. In the same vein, agricultural credit should be given to farmers to enhance adequate food production and reduce the bike of farm produce in the country (Nigeria).
- Nigerian Government should increase its expenditure on skills. It is only skills that lead to productivity and competitiveness as a nation. So, government should invest in skills acquisition in ICT, Telecommunications, Agro-allied, Sports, Vocational training among others. The training should be 80% free practical. There is need for multiple competence, particularly among youths as a measure to curb increase in global joblessness. The greatest challenge today in Nigeria is unemployment. The government should partner with private organizations, to organize entrepreneurship and skills acquisition programs for the youths. There should be a high level of transparency in the program to ensure the best candidates are picked. This way, Nigeria will soon see herself on top of the fastest-growing economy in Africa.
- Increased Agricultural Production: There is need to reposition agriculture as a major driver of the economy, like in the 1960s when it was the major revenue earner in the country. Today, Nigeria spends billions of US dollars a year on the importation of agricultural products. The youths, as earlier stated, should be encouraged to go into Agri-business covering the entire value chain.
For families, this will be a challenging time, and it will require a lot of sacrifice, adjustments and prudence in the management of resources to navigate the economic storm.
Financial institutions should be encouraged to support the real sector playing the intermediation role.
In the Fiscal Policy space from the Finance Bill 2020 the government has taken some key steps in taxation and duties to reduce the burden on families and companies, but the process must be followed through effectively for implementation.
The Government should demonstrate its seriousness in policy by cutting down costs from the Federal to State, and block all the leakages ensuring that funds are invested in infrastructure, healthcare, education and security.
Nigeria is a nation with resilient people. Families should remember that this is just challenging period to navigate what has been an unprecedented year in the nation’s socio-economic space.
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Recession; proactive measures not cyclical factors can resuscitate economy
The National Bureau of Statistics (NBS) released the GDP report for Q3 2020 which officially confirmed the economy has slipped into a recession.
Earlier this week, the Minister of Finance, Budget & National Planning, Zainab Ahmed attended the 26th Nigerian Economic Summit and in her presentation highlighted some of the steps and investments the government is making to bring the economy out of a recession. Some of the points she highlighted were; stimulating the economy by preventing business collapse through ensuring liquidity, retaining and create jobs through support to labour intensive sectors such as agriculture, undertake growth-enhancing and job-creating infrastructural investments in roads, rails, solar power and communications technologies, promoting manufacturing and local production across all levels as well as advocating the use of made in Nigeria goods & services. She also highlighted focus on pro-poor spending as a strategy to mitigate the impact of covid-19 on poor households.
We recall that during the weekend, the National Bureau of Statistics (NBS) released the GDP report for Q3 2020 which officially confirmed the economy has slipped into a recession. Following the 6.10% contraction recorded in Q2 2020, the economy further contracted though at a decelerating rate of 3.62% in Q3 2020. We reckon that prior to the covid-19 crisis, economic growth had began to slow with Q1 2020 GDP growth of 1.87% trailing prior 5-quarter average of 2.29% (excluding Q1 2020). The economy has largely survived on an oil-led recovery which we consider cyclical with other core sectors lagging and reeling from the fallout of the impacts of the 2016/17 recession.
In our view, the government needs to be proactive and strategic about policies it intends to adopt to resuscitate the economy. The focus on social welfare, fiat-led interventions in agriculture, emphasis on infrastructure development and advocacy for local manufacturing is reminiscent of prior strategies that can’t be really be considered successful. In our opinion, the economy is in dire need of influx of investments and adequate skill pool to spearhead resource allocation, which we believe can be provided by the private sector. Thus, the public sector should in our view invest in tackling structural issues around ease of business operations (borrowing costs, regulatory & licensing bureacracies/inconsistencies, public agency corruption & FX policies etc.) as well as strengthening regulatory & legal frameworks while the private sector drives the investments for accelerated growth in manufacturing, infrastructural development, agriculture and other core sectors.
In our view, supporting a free market-led economy (given the more organised nature of the private sector than the public sector) would see a return of foreign direct investments into the Nigerian economy while local entrepreneurs would be motivated to take more risks to develop businesses. The outlook for oil prices remain weak and production levels may remain below historical levels as OPEC attempts to keep price stable. Thus, the possibility of a cyclical recovery is limited, only proactive measures to correct long term structural issues would restore the economy on the path of accelerated inclusive growth.
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