Definition of Economic Recession: An economic recession is defined as a point mark decline in the activities of the economy, sales, industrial production, employment, real GDP and real income, in line with a gradual in the totality of demand for a minimum period of two quarters.
EFFECTS OF ECONOMIC RECESSION IN NIGERIA
- How Does Economic Recession Emerges?
When the increased rate of interest is imposed by the government, automatically the currency or cost of money increases or rises as well. hence, lowering the borrowing ability of the government and consumers. The former high demand for products and services start reducing as a result of the consumer’s courage also experiencing downfall.
Furthermore, the hardship of business operation monetary sector becomes tougher through borrowing and deployment of the workforce by firms thereby causing an increase in unemployment. On a normal ground, the economy’s downward phase is followed by Recession coming with increased unemployment, total stagnation or a gradual fall in the investment and income reduction. The economy from the accruing downward phase either resumes the phase expansion or recession.
WHAT IS RECESSION
The recession is an overall slowdown of a business cycle in economics, growing in a negative manner resulting in a paralyzed economy activity as well. Inflation fall, capacity utilization, GDP (gross domestic product), household income, business profits, and investment spending are all under macroeconomic indicators while there is a rise in unemployment and bankruptcies. The definition of Recession in the United Kingdom is the two quarters coming consecutively of negative growth of the economy.
The period at which Recession occurs generally is when there is an overwhelming fall in spending, shockingly leading to a high increase in demand. Diverse events like external trade challenge, bursting of an economic bubble, adverse supply shock or financial crisis may all be the cause of Recession. The response of Governments towards Recession is usually to adopt the policies of macroeconomic expansion by decreasing taxation, increasing the supply of money, and increasing government expenditure.
- Types Of Recession
The distinctive different types of Recession are highlighted below;
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PSYCHOLOGICAL ASPECTS
Confidence and psychological aspects are well present in Recession. For instance, when an organization is experiencing slowness in economic activity, the adoption of the methodology of reducing the level of employment and thereby increase savings and abandon investment for the main time. Such expectations can Creation of a self-reinforcing
the downward cycle can be caused by such expectation leading to intense and unbearable Recession. An economic sentiment can be measured by evaluation of the consumer’s courageous ability. Psychological attributes that are fundamental to the activity of the economy which is utilized, described and termed as animal spirits. Economist Robert J. Shiller who is an iconic economist stated in his writing the psychological Recession simply refers to the bad faith, sense of insincerity in economic transactions, sense of the depth and level of corruption and the sense of trust that dwells amongst the citizens. Businesses and organization will never perform any capital expenditures as consumers will not patronize them, the will also do much not to employ during this period when the spirits of animal are on the gradual decline
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BALANCE SHEET RECESSION
Balance sheet Recession can be much triggered when there is a bubble in the price of a bursting real estate or monetary asset or a high degree of debt. In this period, consumers and organizations prefer to save rather than make an investment or any capital spending, which in turn gradually lowers or bring down the economy. The balance sheet is an accounting term or identity derived from a commercial section which holds that addition of all liabilities must always be equivalent to that of the assets. The ownership interest must surely be negative when the value of debt liable or subjected to purchase is quite greater than the price tags of assets simply implies that the organization, corporation or consumer is a debtor due for payment. Paul Krugman an economist who in 2014 wrote that “the best theory working the most should be that of the financial crisis, which was only one
performance of a broader challenge of overflowing debt which was famous that is generally known an called “balance sheet recession.”Krugman’s hypothesis points out that this form of crises involves the strategy of reducing debt combined with the higher expenditure of the government to counterbalance the gradual declines experienced in the private sector as the debt is been settled. GDP declines gradually in a balance sheet recession with respect to personal savings left un-borrowed and by the debt repayment fund, having government impetus spending as the only primary solution. Apparently, Krugman emphasized that fiscal policy could also be part of the cause of reduced savings behavior, as the rise in the price of commodities or credible vows of future inflation generates a real rate of negative interest thereby encouraging fewer savings.
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LIQUIDITY TRAP
A Keynesian theory that a situation can develop with the interest rates nearly reaching zero that is- running under a policy of zero interest rate and yet does not intensely affect the economy is simply a liquidity trap. This near-zero rate of interest theory will encourage and enhance firms, institutions, and consumers to spend and borrow. Hence, if debt settlement or savings is the main focus or priority of organizations, corporations and individuals with no plans of spending, reduced rate of interest will be less effective on the behavior of consumption and investment.
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PARADOXES OF THRIFT AND DELEVERAGING
If too much of individuals are pursuing the same motive by saving during the chronic conditions of the economy. This joint behavior may prove to be more detrimental to the economy which is optimally due for an individual, when this kind of scenario is in place, what it literally implies is that paramountly, one person’s income is another person’s consumption fund. Indigenously, the paradox of thrift as it is so called refers to a lot of consumers with the attempt and mentality of saving or settling debt which increases the duration and deepens the cause of Recession.
The gradual fall in employment and demand which as well gives great depth to the credit crunch and losses credit surged by financial institutions. The act of deleveraging balance sheet has the power of overwhelming all the economy and all its corners. When consumers are not practicing purchasing any longer specifically on durable goods, for their savings to grow, firms and businesses are crossing out plans on investments and deploying their staffs to save enough cash, and institutions of finance are folding up assets mainly to secure capital and enhance their chances of overcoming the storm.
EFFECTS OF ECONOMIC RECESSION IN NIGERIA
- COLLAPSE IN OIL PRICES
There is an Economic Recession, there is no money in Nigeria, but it will not go beyond this level. Antagonizing the history of oil price collapse, the major exporting product or resources went into Recession for the very first time in a period of about 20years, making the largest west Africa economy drop with a percentage of 2.1%.
- POWER SUPPLY SHORTAGE
Some other factors such as high Inflation rate, electricity shortage and fall in oil prices not excluding the mini-war faced by the northern part of the country, also contributes to the Recession although in the negative manner, which led to the poor outcome seeing the Continent’s most rated economy, become suddenly poor.
From the start of Muhammadu Buhari’s regime, oil price quickly dropped to 37 dollars per barrel from the normal cost of 100 dollars per barrel, but now within the interval of 40-45 dollars per barrel, which never sufficient for the essential provisions of financial flow in the country.
Others are: – High-interest rate – Reduced real wages – Reduced consumers’ confidence
The consequences of the recession are Evasion of tax, GDP losing and Rate of high inflation.
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Conclusion On The Effects Of Economic Recession In Nigeria
Nigeria came out of the recession only because there was a little rise in the country’s GDP as the price of oil increased a bit. Hence the only way out of recession is to find a means of increasing GDP and encouraging investment and private businesses which would also decrease the unemployment rate.
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