Wednesday, August 31, 2016
Africa's biggest economy has crashed into recession
Africa's largest economy, Nigeria, has officially entered recession after two consecutive quarters of contraction.
Gross domestic product shrank by 2.06% in the second quarter of 2016, following a 0.36% shrinking in the first quarter, according to data released by the country's National Bureau of Statistics on Wednesday.
Those two consecutive quarters of economic shrinkage mean the country is in its first recession in more than 20 years.
Recession in Nigeria may be an unwelcome development, but it is not unexpected. Earlier in the year, Godwin Emefiele, the governor of the Central Bank of Nigeria, warned "recession was imminent," the Financial Times reports.
"We have long warned of a slow-burning crisis in Nigeria," Capital Economics' Africa economist, John Ashbourne, said in May. "It now seems that this view was too optimistic: The country is headed into a full-blown economic crisis."
The International Monetary Fund has also warned on the state of the country's economy, forecasting that growth will shrink by 1.8% in 2016.
The big driver of the slump in the Nigerian economy, which was one of Africa's great success stories until recently, has been the persistently low price of oil over the past 2 1/2 years. Nigeria relies heavily on oil and is the largest producer of the commodity on the continent, producing roughly 2.4 million barrels a day. Given that oil's price has slumped from more than $100 a barrel in 2014 to roughly $48 now, it is perhaps unsurprising that the country has struggled to find economic growth.
The Nigerian oil industry's problems have been made even worse by a series of major disruptions in the oil-rich Niger Delta area, caused largely by a militant group calling itself the Niger Delta Avengers. Most notably, the group attacked a Chevron offshore facility in May and the underwater Forcados export pipeline operated by Shell in late March. The production disruptions caused by these attacks and others have wreaked havoc with the already stricken industry.
Dr. Yemi Kale, the CEO of the National Bureau of Statistics, tweeted to illustrate just how badly oil revenues in the country had been hit:
Growth in non-oil sectors of the country's economy has also been badly hit, as Business Insider's Elena Holodny wrote in May, with manufacturing taking the biggest hit. Non-oil GDP contracted by 0.38% in Q2, according to a tweet by Kale. The country's decision to unpeg the naira against the dollar does not appear to have led to a hoped-for influx of dollar investment. Instead the government is now dealing with inflation.
"This is very bad news for Nigeria's government, which has justified the current FX system as a method of promoting non-oil industries," Ashbourne of Capital Economics said. "It is now clear that these policies have — as we'd long argued — made a bad situation worse."
While things look pretty bleak for the economy, research from Barclays circulated to clients on Wednesday argues that the worst of Nigeria's crisis may be over.
"Economic activity in Q3 16 continues to be hampered by security concerns in the Niger Delta, ongoing FX shortages, rising inflation and significantly tighter monetary policy. That said, the decision by militants to stop attacks, the implementation of the 2016 budget and better availability of FX, despite it remaining a massive constraint, suggests a marginally better outlook for H2," Ridle Markus argued in Barclays' "Sub-Saharan Africa Daily" note.
Markus did say, however, that "for the year as a whole, we fear that the economy is set to contract, which will be the first full-year recession since 1991."