…Is the – 0.4% (mild recession) achievable?
…Projected recession of -4.4% for 2020
-By Professor Chijioke Nwaozuzu
To address the issues of achievable level of recession and stimulus measures that could help reduce the Covid-19 induced recession, some fundamental macro-economic relationships should be examined.
Firstly, High Consumer Product Prices = High Inflation rate = High bank interest rate = High foreign exchange rate = High unemployment rate.
Secondly, Gross Domestic Product (GDP) = Consumer Expenditure + Investment or Business expenditure + Government expenditure
Thirdly, Gross Domestic Product (GDP) = Gross Domestic Expenditure (GNE) = Gross Domestic Income (GDI).
Considering the first equation, the prices of consumer goods are high due to border, airports, inter-state and in some cases intra-state lockdowns. As a result, the inflation rate, bank interest rates and foreign exchange rates are currently high.
Second equation – As the lockdowns persist, consumer expenditure and business expenditures are drastically reduced. Government expenditure in regard to capital projects are also suspended, remaining just recurrent expenditure. So, GDP growth rate, of course, will hit below zero (that is negative GDP), and result in economic recession.
Looking at the third equation, the lockdowns generates substantial job losses, and attendant reduction in personal and corporate income levels. Significant lower income levels result in significant lower expenditures and savings. Again, this will translate to a less than zero GDP (economic recession). If the negative GDP growth rate persists for a long period of time (6 months and above), the outcome will be economic depression.
As the number of new cases of Covid-19 rises, Government has two devil’s alternatives – selective opening up of the economy and risking more spread of the virus, and maintaining the lockdowns with severe implications for the economy.
The first option entails a trade-off between generating some economic growth and accepting a certain level of human sacrifice. The second option will save more lives in the shut-run, but as the economy hurts, more people may die from hunger than from the virus itself. These are very tough choices, and must be given concentrated thought. Striking a delicate balance is, therefore, imperative.
Considering the second equation, significant government expenditure is mandatory to stimulate the economy and reduce the level of economic recession. We are talking about 40 billion dollars and above, and the focus should be on bailing out some of the big businesses (Banks, Telecoms companies, DISCOs, etc), and boosting the capacity of Micro, Small and Medium Scale Enterprises (MSME’s) through low bank interest rates.
The difference between the low interest rate and the high interest rate that banks would have otherwise charged (due to high inflation rate) should be treated as a government subsidy.
Professor Chijioke Nwaozuzu is currently the Director of Emerald Energy Institute (EEI), University of Port-Harcourt.