Is recession II around the corner? It is a scary question to ask but the data coming in about the economy shows that the country risks experiencing another recession this year. The Initial data that raised concern is the Gross Domestic Product (GDP) figures for the first quarter of 2018, which showed that the economy grew at just 1.95 percent in the period. Even though the growth figure was positive and represented a reversal from the -0.91 percent negative growth recorded in the same period of 2017, the concern was that it was lower than the 2.11 percent growth recorded in the last quarter of 2017.
However, the slower growth in the first quarter of 2018 could be explained away by the fact that it is still the first quarter of the year and that activities are usually low during this period. This is usually unlike the last quarter of the year when activities are usually at its peak. In the first quarter, most businesses are still trying to put their budgets together, execution of the year’s strategy is just beginning and results are not expected immediately.
The action starts in the second quarter of the year, when execution has fully taken off and green shoots of outcomes are expected to start showing to affirm that the business is on the right track. This means that economic growth in the second quarter is expected to be a good indicator of how the economy will perform for the rest of the year. If growth is low in the second quarter, then half of the year is already gone and chances of recovering it in the second half of the year is slim.
This is why whispers of recession II is emerging following the release of some forward indicators of economic performance in the second quarter of the year. The first forward indicator of concern is the fact that May have turned out to be the worst month of performance on the stock market in 2018. A slowdown that started in April went into a full negative dive in May wiping out all the positive gains accumulated in the stock market since January.
Returns on the stock market in May was a negative -3.38 percent, plunging the All Share Index (ASI) January to May performance to a negative position of -3.73 percent. The 16 percent gain that the market made in January has turned sour. When your stock market turns sour, it should be of concern since it could be a forward indicator of the underlying trouble in the economy.
But if the slowdown in the stock market that started in April and turned negative in May could be ignored, because the stock market does not fully reflect all sectors of the economy, then the Purchasing Managers Index (PMI) released in May has given further cause for concern. The Central Bank of Nigeria (CBN) Manufacturing PMI came in at 56.5 in May, indicating an expansion in the manufacturing sector, which represents a fourteenth month of consecutive expansion. This would normally be good news except that expansion in the manufacturing PMI was at a slower pace than it expanded in the previous month of April when the manufacturing PMI which stood at 56.9.
But the PMI from FBNQuest painted an even gloomier picture of the economy in May than that of the CBN. The headline PMI from FBNQuest declined from 51.0 in April to 49.2, below the 50 points mark, an indication of a contracting manufacturing economy. It is the third month of consecutive decline for the FBNQuest PMI and the lowest since January. As noted in the FBNQuest report, PMI is a ‘forward indicator.’ In this case, it shows that the manufacturing sector could be contracting. Respondents to the FBNQuest PMI survey are said to have cited uncertainty over demand especially over consumer demand.
The report notes that while inflationary pressures are easing, household demand remains subdued. So, even though companies are getting access to foreign exchange and expanding production, consumer demand is not catching up and manufacturers are beginning to apply caution in expanding production. However, FBNQuest also notes that the Ramadan season may also have affected consumer demand.
While this may be true, there are indications that the lower purchasing power from consumers goes a bit deeper. Data from the Financial Derivatives Company shows that consumer confidence was already in the negative zone as at April (-6.4) and this was the month before Ramadan started. Months of double digit inflation, compounded by rising unemployment have taken a toll on consumers whose incomes have remained largely stagnant in the period. Even though inflation is now on a downward trend, the impact on purchasing power is likely to be negligible considering that real incomes have declined.
But the greater concern is that with the very low growth recorded in the first quarter and the ‘forward indicators’ in the second quarter, the economy risks another recession soon after the 2016 contraction in the economy. The indicators clearly show that the real sector is already suffering and the economy may have to rely on the oil to power it to a higher growth in the second quarter.
But all is not well with the oil sector too. There have been reported leaks on the Trans Forcados Pipeline and another one on the Trans Ramos Pipeline already in May which put at risk almost 300,000 barrels per day of the country’s oil production in May. This means that growth in the oil sector may fall below projections in the sector. The rainy season also means that the agricultural sector is in the planting season and therefore output is also likely to be constrained in the second quarter.
Hopes for a fiscal stimulus for the economy from the 2018 budget failed to materialize in May. Even if the budget is signed in June, it will be coming too late to have any positive impact on economic growth in the second quarter. All evidence is pointing to the economy recording a lower growth in the second quarter than it did in the first quarter. A lower growth below 1.95 percent will push the economy closer to the contraction line in the second quarter.
This would not be unprecedented and would just be the consequence of the government failing to pay attention to the economy and prioritizing politics over the economy. Even though there is optimism among economists that the economy will not run into another recession this year, the risk is high that we are looking at another recession or at best another year of marginal economic growth.
Anthony Osae-Brown
