For the second time in five years, Africa’s largest economy is in recession, in what is a painful squeeze for Nigerians, majority of who are impoverished and without jobs.
The Purchasing Manager’s Index (PMI), a leading economic indicator, has confirmed that Nigeria slipped into its second recession in five years in the third quarter of 2020 as dwindling oil prices and the COVID-19 pandemic took a toll on Africa’s largest economy.
The official Q3 GDP data is expected to be published by the National Bureau of Statistics (NBS) on Monday, November 23. In Q2, the NBS reported that the economy contracted by a record 6.1 percent.
An economy is said to be in recession when output contracts for two straight quarters.
The average PMI for the months of July, August and September (which make up the third quarter) was 45.03 points, according to the Central Bank of Nigeria’s PMI data, the lowest (third quarter) reading in four years.
Whenever PMI is below 50 points, it’s a sign of contraction while a reading above 50 signals expansion.
The PMI numbers go further to indicate that third quarter numbers would be better than the record contraction in the second quarter, which is in line with analysts’ estimates. This is as Q3 PMI shows an improvement compared to the 40.7 points recorded in the second quarter.
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There’s a strong correlation between PMI and GDP numbers such that when there’s a contraction in PMI, there’s also a contraction in GDP. When the economy contracted for the first time in a quarter of a century in 2016, the PMI numbers flashed signs of a downturn even before the official numbers were announced.
The consensus estimates of 10 economists surveyed by Business Day indicated a contraction of 3.5 percent in Q3. All 10 expect a recession. Their prediction is also shared by the World Bank which predicts Nigeria’s flailing economy is set for its worst recession in four decades by the end of 2020 due to the negative effects of the coronavirus pandemic on oil revenue, which the government relies on for over 50 percent of its budget and a dominant chunk of foreign exchange earnings.
The economists surveyed expect a recovery in GDP by the second quarter of 2021, due to low base effects following the big slump in Q2 2020.
However, that recovery is unlikely to impact the majority of Nigerians given that GDP per capita, which divides a country’s economic output by its total population, is still tipped to continue contracting as it has done since 2015 until the government accelerates reforms that can deliver economic growth in the range of 4-6 percent.
The Pain of recession
A second recession in five years is particularly painful for Nigerians, the majority of whom are impoverished and unemployed. It means average incomes will fall for the sixth consecutive year in 2020 as economic growth continues to struggle to match population growth.
Since companies tend to cut back on expenditure during economic recessions, it also means job creation is at risk, which will worsen Nigeria’s already high unemployment rate which stood at 27.1 percent in the second quarter of 2020, according to NBS data.
The data showed that some 22 million Nigerians were unemployed in the period under review. When people who are underemployed are factored, the number rises to 50 million, half of the country’s labour force. That implies that one in every two Nigerians in the country’s labor force is either unemployed or underemployed.
Weak economic growth and the rise in unemployed Nigerians will only compound the country’s long-running problem with lifting citizens out of poverty. Despite sustained high oil prices in the 2010s, Nigeria overtook India in 2018 as the country with the most people in extreme poverty, according to the global consulting firm, Brookings Institution.
The growing economic hardship is particularly damning for the administration of Nigeria’s president Muhammadu Buhari, which has struggled to deliver economic policies to drive growth and create jobs. The administration’s plan to lift 100 million Nigerians out of poverty by 2023 looks a pipe-dream at best.
The impact of the COVID-19 pandemic on oil prices and the lockdown Nigerian authorities resorted to in order to curb the spread of the virus as well as the civil unrest which occurred in the third quarter of the year was always going to take a toll on the economy in 2020.
Experts believe that while the country’s Gross domestic product (GDP) may improve marginally quarter on quarter in Q3 compared to Q2 but a recession was always unavoidable.
Nigeria is not the only country to be faced with a recession this year with several other developed and developing economies from the UK to South Africa also reeling from the negative effects of the pandemic.
Historical relationship between PMI and GDP
The PMI is a leading indicator of how the economy will fare within a period. It is computed based on survey responses from sector leaders, indicating changes in the level of business activities in a month.
The relationship between PMI and GDP was quite visible in 2016 when it foretold a rare recession.
PMI had dropped below the benchmark of 50 points to 45.8 points in Q1 2016 before the official numbers by the NBS would indeed confirm that GDP contracted by 0.67 percent.
The PMI data also flashed the first signal that Nigeria would exit recession after expanding to 52.15 points in the second quarter of 2017. Again, the NBS confirmed the economy’s exit from recession after reporting growth of 0.72 percent.
Yinka Ademuwagun, a research analyst at United Capital Plc said the PMI is one of the variables that can forecast what to expect in economic performances adding that the PMI so far has been contracting which shows that the economy is also contracting however at a slower pace compared to Q2 when it contracted at a faster pace.
“In Q3 we have seen an improvement in the PMI compared to the second quarter, so our expectation of Q3 GDP is that it should be an improvement compared to Q2, although it will still be a negative number of around -3 percent majorly because activities gradually resumed as the lockdown eased during the period,” Ademuwagun said.
“What that signifies is that although the economy is yet to recover from the pre-COVID-19 level, it is improving,” Ademuwagun explained.
Giving an outlook for the fourth quarter, he said “the economy will still contract in Q4, because the protest which unexpectedly led to looting and unrest destroyed a lot of businesses and disrupted economic activities although we expect the yuletide activity will spur demand in Q4, we can however expect better recovery in Q1 20,” Ademuwagun added.
Tajudeen Ibrahim, head of research and strategy, Chapel Hill Denham, said that for the third quarter of 2020, a contraction will be expected however at a slower pace compared to the second quarter.
“A 4.5 percent contraction is expected in Q3, and this is because of the gradual resumption if activities and the reopening of the economy, signifying a slight improvement in economic conditions however, the economy will suffer a recession and this will mean further hardship for citizens,” Ibrahim said.
He recommended that the fiscal and monetary authorities implement policies that will steer the country on to a recovery path.
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