Editor’s note: After years of economic crisis, the Nigerian Bureau of Statistics (NBS) recently declared that Nigeria has finally come out of recession.
In this article sent to NAIJ.com by Geoff Iyatse, writes about the economic recession and its variants.
Iyatse is an award-winning journalist/public relations practitioner.
Economists more often than not hope that models would fit into real-life situations subject to the assumption that extraneous variables will be static, at least in the short-run.
The nuisance caused by intervening factors, in most cases, is the major difference between theories and the behaviour of the economy. Serious as these factors are, their consideration, in economic modelling, is largely seen as an exemption, and not the norm.
But the intrusion of the contravening factors has become the rule in the study of the Nigeria macroeconomic indicators. In theory, inflation and unemployment are inversely related, meaning that the two indicators tend to move in opposite direction such that national economic managers can tolerate a reasonable level of inflation, to reduce the unemployment rate to a level considered to be socially justifiable.
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But that popular theory, which defines the relationship between inflation and the labour market, as first explained by Williams Philip’s findings several decades ago, has little or no relevance to Nigeria.
Perhaps, the trade-off between inflation and unemployment is something that we have never experienced. However, the speed at which inflation and unemployment tend to converge in the past two years is beyond the contemplation of stagflation theorists.
And interestingly, the victims of this apparent eccentric market behaviour erroneously hope that more jobs will curb the excessive inflation growth. This wishful thinking is similar to the wrong impression that high cost of living is attributable to joblessness whereas reverse should be the case.
Stretch this labour market oddity to economic recession. Last week, the Nigerian Bureau of Statistics revealed that the country had officially worked its way out of recession as the economy, measured by the gross domestic product, expanded by 0.55 in the second quarter of this year. Cheering news it was, indeed.
For a society that has experienced untold hardship manifesting as rising cost of living, poverty, exclusion and deprivation in recent years, the stream of reactions were expected. If not for anything else, the public interest it generated shows that Nigerians are increasingly active. But what shocked me was the level of ignorance exposed via the public comments.
Getting out of recession suddenly became another magic slogan. People wanted to know why every adult had not been employed on the strength that Nigeria was out of recession. Some wondered why the cost of living was still astronomically high. And others queried the reason they still bought a cup of rice for N70 the day the announcement was made.
For the last group, I have good news for you – you will, all things being like economists would say, pay more for the same commodity when the recession is, indeed, over. You will soon know why.
On a serious note, we have taken recession for what it is not. If a market woman expects prices of goods to fall because recession is over, one would understand the underlining deficiency. But what would you say about a radio presenter who goes on air to probe the reasons prices of commodities remain high notwithstanding the NBS’s revelation?
Taking into consideration the absurd behaviour of the recessionary trend in the past few years, one can understand the confusion. “If prices go up during recession, it should fall during boom era.”
This could be the logic behind the misunderstanding; this thinking also betrays the inconsistency of the local economy. Unfortunately, it is one absurdity that has defined and exposed the shortcoming of the local economy. But this is not an issue this article can treat with dispatch. Its focus, instead, is inflation and its skewed Nigerianness.
First, inflation is essentially triggered by declining aggregate demand. When sales drop, perhaps as a result of weak purchasing power of the consumers or other factors, the producers cut the volume of output they churn out. This initial output cut calls for a new optimisation process, which in most means a cut in labour, a major variable input.
With some hitherto employed individuals now jobless, aggregate demand falls further, leading to another round of contraction in production, which is captured by the GDP. We should recall the basic economic theory – the lower the demand, the lower the price. So, inflation actually should and does lead to lower prices.
And this is even more complicated than its face value appears. Economics, as the science of allocation of resources, thrives essentially on the fluid human behaviour and rationality. And expectation is a critical factor in human behaviour analysis.
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When prices start falling owing to plunging demand, people begin to form certain expectations about the future, one of which is that prices would likely fall lower. When this happens, consumers become more rational and postpone consumption, especially of non-essential commodities.
The impact of expectation on consumption and business activities could actually trigger a major crisis that lead to a depression – a protracted recession – especially if necessary monetary and fiscal measures are not taken to rev up confidence. Do you now understand why a recessed economy is delicate and sensitive?
To be continued.
Meanwhile, NAIJ.com had previously reported that the National Bureau of Statistics (NBS) confirmed that the country finally came out of recession with a positive growth in its Gross Domestic Product (GDP).
The views expressed in this article are the author’s own and do not necessarily represent the editorial policy of NAIJ.com.
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