As the recession continues to bite hard in Nigeria, it is quite worrying to know that many still do not even totally grasp how a recession works, or even what it really means.
Recession in Nigeria
Beyond the increasing price of foodstuff and other commodities, what does a recession truly mean, how does it work, when is it likely to stop and what will the government do about it?
Below are essential things to know about the recession:
1. What is a recession?
According to the National Bureau of Economic Research (NBER), a recession is defined as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales”.
The Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
In a recession, businesses cease to expand, the GDP diminishes for two consecutive quarters, the rate of unemployment rises and housing prices decline.
2. What causes recession?
Many factors contribute to an economy’s fall into a recession, but the major cause is inflation. Inflation refers to a general rise in the prices of goods and services over a period of time.
Inflation is defined according to investopedia as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every naira you own buys a smaller percentage of a good or service.
The low prices of oil, the volatile state of oil production in Nigeria, bad debts gathered over time, has led to lower purchasing power and foreign exchange scarcity.
3. How does recession affect a country?
According to economists, two consecutive quarters of negative growth in gross domestic product (GDP) leads to a recession. Large and small businesses are affected, as production slows down.
The country sinks into loss of jobs, a decline in real income, a slowdown in industrial production and manufacturing and a slump in consumer spending. Things generally get more difficult and firms publicly traded on major stock exchanges may ultimately be hurt.
4. What should you not to do in a recession?
There are a number of things that should not be done during a recession. The underlying principle to all of them, should be to cut back heavily and reduce spending.
This would be the worst time to take a loan, invest in a risky business expenditure, or buy a new car. This would also be the wrong time to stand surety for someone.
Also note that, one major effect of the recession is downsizing. Companies are laying off workers, so this would be the wrong time to take a leave from work or show your employers in any way that they do not really need you.
5. How long will the recession last?
Economists are not sure exactly how long a recession will last, but studies show that the average recession lasts about 22 months. Also according economists:
- If recessions are caused by a tightening of monetary policy (higher interest rates to reduce inflation) then it tends to be easier to get out of a recession, as the interest rate rise can be reversed and this will boost demand.
- If the recession is more of a balance sheet recession (bad debts, falling asset prices, bank losses) then the recession will tend to last much longer. For example, in 2009, interest rate cuts were insufficient to boost demand.
The Nigerian recession is caused by a combination of factors including a dip in oil prices, government spending, which has led to inflation.
However bad debts are a key problem, so this inflation is likely to last up to a year or more. Economists predict that it should stabilize in 2017.
Moody’s, one of the big-three credit rating agencies in the world spoken up about the current economic recession affecting Nigeria.
“Moody’s projects stagnation in real GDP in 2016, stating that the country will get out of recession in 2017, with a “subdued growth at 2.5% in 2017,” the report read.
“We expect that Nigeria will contain pressures on its public finances in the short term. However, there is greater doubt about the severity of the impact of these challenges, particularly on government liquidity and economic growth, over the medium term,” added Aurelien Mali, a VP-Senior credit officer at Moody’s.
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