People & Money

Nigeria Enters “Technical Recession”, Deepest Since 1987

A technical recession is often caused by a single event e.g. the fall in oil prices or an outbreak of plant or animal diseases. It’s a bit complicated for Nigeria. A fall in oil prices often results in lower economic output. But while the fall can be a temporary shock, Nigeria’s vulnerability to declines in the global oil price is due to deep structural factors summed up as a decades-old preference for policies which encourage consumption rather than savings and investment and entrench dependence on the oil sector. Thus, a technical recession reflects underlying economic problems.

The Nigerian economy has slipped into its second recession in five years as the nation’s Gross Domestic Product, GDP, shrank for the second consecutive quarter this year.

The National Bureau of Statistics, NBS, announced on Saturday the nation’s GDP recorded negative growth of 3.62 percent in the third quarter of 2020 after it had earlier recorded a 6.10 percent contraction in the second quarter.

IN CONTEXT

The technical definition of a recession is a negative economic growth in two consecutive quarters. But there is a difference between “technical recession” and a “recession”.

The key difference is that a technical recession means that while GDP figures might show that the economy is producing less, government and households are spending less or less income (profit and wages) is generated, the decline is temporary.

A recession on the other hand is likely to be “structural” i.e. caused by deep-seated as opposed to one-off factors and last longer. A technical recession is often caused by a single event e.g. the fall in oil prices or an outbreak of plant or animal diseases.

A recession tends to translate into declines in a range of economic activity and translate into lower employment, reduced investment, lower household and corporate incomes etc.

It’s a bit complicated for Nigeria. A fall in oil prices often results in lower economic output. But while the fall can be a temporary shock, Nigeria’s vulnerability to declines in the global oil price is due to deep structural factors summed up as a decades-old preference for policies which encourage consumption rather than savings and investment and entrench dependence on the oil sector. Thus, in Nigeria a technical recession reflects underlying economic problems.

Technical recessions in Nigeria are successive body blows to the economy which leave lasting structural damage rather than light jabs which see the economy spring back into shape.

Also Read: BIG READ: The Subsidy Traps and Nigeria’s Destiny: Will Buhari Set Nigeria Free?

It is the nation’s second recession since 2016, and the worst economic decline in almost four decades. This year’s recession is worse than that of 2016. The last time Nigeria recorded such cumulative GDP decline was in 1987 when the gross domestic product declined by 10.8 percent.

The Nigerian economy has been battered by the COVID-19 pandemic, which caused a significant decline in oil revenues as global economic activities stalled.

Crude oil accounts for nearly 90 percent of Nigeria’s foreign exchange earnings although it contributes less than 10 percent to the GDP. It contributed just 8.73 percent to economic growth in the third quarter of 2020.

Oil production fell to 1.67 million barrels a day from 1.81 million barrels in the previous quarter, according to Bloomberg figures, the lowest since the third quarter of 2016 when the economy last experienced a recession.

Last month, the World Bank revised its 2020 forecast for Nigeria’s economy to -4.1 percent from its previous projection of -3.2 percent, saying the country’s near-term outlook was subject to “considerable uncertainty”.

The bank had forecast in June that the collapse in crude oil prices, coupled with the new coronavirus 19 pandemic, was expected to “plunge the Nigerian economy into a severe recession, the worst since the 1980s”.

Before the pandemic and its attendant disruption, the Nigerian economy was forecast to grow by 2.1 percent in 2020.

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