Nigeria watches as all signs point to global recession 2023

BY OLIVIA NNOROM, CHISOM NWATU & ROSEMARY IWUALA

• Analysts express concerns for Nigeria
• Point out possible cushions
• Proffer options country could pursue

Economies across the world have taken a beating since the turn of 2022, exacerbated by the Russia-Ukraine conflict, just as the world economy seemed to be recovering from the impact of the COVID-19 pandemic.

From the US to China to the UK to Europe and emerging markets, it has been a tale of decelerated or negative headline GDP growth, spiralling inflation, interest rate hikes by central banks, and overall cost of living crisis.

Major global financial institutions have cut their growth projections and economic experts are left guessing not just whether or not a major global economic crisis is in the offing in the coming year but how steep the downturn is likely to be.

Last month, the International Monetary Fund (IMF) revised its growth forecasts, projecting that global GDP growth will slow from 6.1 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023.

In September, the World Bank warned that as central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023 and a string of financial crises in emerging markets and developing economies that would do them lasting harm.

The World Bank, in a comprehensive study, said central banks around the world have been raising interest rates this year with a degree of synchronicity not seen over the past five decades, a trend that is likely to continue well into 2023.

To cut global inflation to a rate consistent with their targets, the study said central banks may need to raise interest rates by an additional two percentage points. If this were accompanied by financial-market stress, global GDP growth would slow to 0.5 percent in 2023 – a 0.4 percent contraction in per-capita terms that would meet the technical definition of a global recession.

The bank said the global economy is in its steepest slow down following a post-recession recovery since 1970. Global consumer confidence has already suffered a much sharper decline than in the run-up to previous global recessions. The world’s three largest economies – the United States, China, and the euro area – have been slowing sharply. Under the circumstances, even a moderate hit to the global economy over the next year could tip it into recession.

But the debate continues to rage among economic experts regarding whether a global recession in 2023 is avoidable or inevitable.

What global analysts say

Project Syndicate, an international media organisation that publishes and syndicates commentary and analysis on a variety of global issues, asked four of its commentators to weigh in on the debate.

Jeffrey Frankel, an international macroeconomist and James W. Harpel professor of Capital Formation and Growth at Harvard University’s Kennedy School of Government, said even though the US economy is experiencing a slowdown, and there are higher-than-usual odds of a downturn in Europe, which has been hit hard by reduced supplies of Russian natural gas; China, where COVID-19 lockdowns already turned growth negative in the second quarter; and other countries, including emerging-market economies with debt troubles, “a global recession is entirely avoidable”.

Frankel said despite a momentous global GDP growth deceleration forecast by the IMF, the world growth is unlikely to meet a two-negative-quarters threshold.

“Even by laxer criteria like GDP growth below 2.5 percent, global recession is very far from inevitable,” he said.

Anne O. Krueger, a former World Bank chief economist, reckoned that whereas there is uncertainty as to whether the US economy will be dominated by inflationary or recessionary pressures, there are chances that “if policymakers’ judgement is correct, the US could re-attain the Fed’s target inflation rate and satisfactory growth without falling into recession”. The greater uncertainty, she said, lies with what happens in the rest of the global economy.

“The effects of the war in Ukraine and the related European energy shortfall, China’s economic slowdown, and the prospective debt difficulties of some developing economies and emerging markets are all currently unclear,” Krueger said.

“Whether the balance of risks is toward inflation, recession, or a smooth landing from current turbulence depends on unknowns such as the duration of the Ukraine war as well as the factors listed above. But a global recession is certainly not inevitable,” she said.

Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK treasury minister, pointed to “creeping evidence” that the inflationary surge has – at least so far – been transitory, with commodity prices easing and measures of long-term inflation expectations quite stable”.

“If this continues, central banks will become less hawkish and will not have to weaken their economies further to stabilise prices,” he said.

He said with Russia’s unique influence on European natural gas prices, a recession in Europe is quite likely without some major breakthrough in the war in Ukraine, adding, “Sadly, that currently does not look very probable.”

For Stephen S. Roach, a senior fellow at Yale University’s Jackson Institute for Global Affairs and senior lecturer at Yale School of Management, “a global recession does indeed appear inevitable”.

“For the global economy, the last five recessions have all occurred when world GDP growth fell below the 2.5 percent threshold. That represents a one-percentage-point shortfall from the post-1980 average of 3.5 percent. As such, when global growth falls into the 2.5 percent to 3.5 percent range, my rule is to sound a stall-speed alert. The lower half of that range, 2.5 percent to 3 percent, is especially ominous – a perfect predictor of global recession,” Roach said.

“The last several forecast revisions in the IMF’s World Economic Outlook flash unmistakable signs of stall-speed alert. The Fund’s current global growth estimate for 2022 of 3.2 percent represents a stunning downward revision of 1.7 percentage points from its October 2021 assessment, and its latest estimate of 2.9 percent global growth for 2023 is in the lower half of the stall-speed danger zone,” he said.

He projected that more downward revisions are likely, with the European economy leading the way.

“The US economy is only just starting to feel the lagged effects of a far more restrictive shift in Fed policy. And the struggling Chinese economy, reeling from property-sector deleveraging and zero-COVID lockdowns, lacks the cushion that prevented global recessionary relapses during 2012-16,” he said.

“Collectively, Europe, the US, and China make up about half of world GDP on a purchasing-power-parity basis. With no other economy able to fill the void, I am afraid a global recession does indeed appear inevitable,” he further said.

How prepared is Nigeria?

Even with all the signs, and with the divergent views expressed by global economic experts, the likelihood of a global recession in 2023 is still a matter of conjecture. However, if it does occur, is Nigeria prepared for it? And how should Nigeria prepare?

To find answers to these questions, Business A.M. polled a number of economic experts and analysts who shared their views.

Eseosa Onaghinon, an investment banker, former head, TMT, client coverage, corporate and investment banking at Stanbic IBTC, and who currently oversees investments and private equity at Morningside Capital, said major economies of the world are already experiencing recession and the UK has had its longest run thus far.

“The technical definition for recession is when you have a negative GDP growth rate for two quarters. The Russia-Ukraine war has led to increased inflation as prices have skyrocketed globally,” Onaghinon said.

On whether or not Nigeria is prepared for such a recession, he answered in the negative, saying the country does not have the relevant cushion at this juncture.

“These cushions would have been, increased export, local production of her food consumption, amongst others. This is not currently the situation with Nigeria. We have subsequently compounded our high inflation rate  with a withdrawal of currencies leading to artificial demand for fx; which has led to further devaluation and more expensive inputs, especially as CBN is not able to satisfy the fx demands for importers and manufacturing companies,” he said.

Yet, Onaghinon believes that Nigeria can still escape recession if it takes the right measures.

“There is usually a lag for Nigeria due to the fact that we may not be as integrated with the globe. Nigeria knows her issues already. UK, US, many European countries are currently managing increases in inflation and focusing on addressing it, just like Nigeria. If Nigeria is able to earn USD faster, then we could have a lasting mitigant in place,” he said.

Marcel Okeke, a Lagos-based economist and business strategy and sustainability consultant, highlighted some major challenges that can plunge Nigeria into recession in 2023, including fuel subsidy, loans/debt, loan repayment, and oil theft.

“These challenges need to be resolved if Nigeria wants to avoid plunging into recession,” Okeke said.

“If by next year the Dangote refinery commences full operations and starts having our fuel refined locally, it will help save the huge sum of money spent to import petroleum products and in turn be a step ahead to save the economy,” he said.

The former chief economist at Zenith Bank Plc said the rate of loans the Nigerian government has acquired, both foreign and domestic, and the difficulty in repaying these loans give cause for worry.

He, however, said a new government coming into power next year is a major factor that could save Nigeria from recession, adding that a lot depends on the decisions and actions taken by the incoming government after the country’s general elections.

“If the new government in 2023 should reduce the rate of borrowing, so that the external and local debt will be reduced while managing the previous debt, it will also help save the economy from recession,” Okeke said.

Another major step to avoid recession, according to him, is to put an end to the ongoing massive oil theft in the country.

“If the new government next year should put a stop to oil theft, it will enable the country to have enough oil to export and increase revenue and foreign exchange,” Okeke said.

“And if it eventually plunges into recession and these measures are adhered to, it will pull the country out of recession,” he noted.

Charles Abuede, an economic analyst at Cowry Asset Management, said the coming 2023 polls and the current preparations and expected change in government signal a possible instability in the economy, which will be visible in rising price levels due to election spendings, investor wariness on the policy and market direction towards growth, among other factors.

“Nigeria may not look prepared for the woes that accompany a recession after it struggled to exit two recessions in eight years when we consider the debt levels, rising inflation, currency devaluation, among other factors. For real context, the impending effect of a recession on the markets and dependent economies, including Nigeria, has left a muse on how it will impact on remittances inflow and petrodollar earnings,” Abuede said.

“We believe the need to address the issues about foreign investment flows and creating an enabling environment to allow for the local industries to thrive stays sacrosanct, as well as finding ways to improve petrodollar earnings, among others, can help whet the ground to withstand probable shocks from the impending downturn,” he said.

Dominic Essien, chief executive officer of fintech firm, TVIO Solutions, said Nigeria is “absolutely not” prepared for a recession should it occur next year.

“We are still heavily dependent on imported goods and raw materials. The fx as at today raises serious concerns for balance of trade or payments issues,” he said.

Essien said elections are around the corner and very little attention is paid to economic management. As such, whatever happens next year in terms of economic crisis will catch Nigeria napping unless something drastic is done.