The International Monetary Fund, IMF has in recent weeks projected that Nigeria’s economy might face the worst economic recession in 30 years. IMF further stated that Nigeria’s economy will likely recede by 3% in 2020 due to the Coronavirus pandemic, which has disrupted global supply network. All of these projections and forecasts will definitely have an impact on businesses and individuals alike. Hence a reason for coming up with this post to explain to the layman in simple terms what “Economic Recession” is by highlighting its effects, benefits, and tips for surviving the period for both individuals and businesses.

According to the National Bureau of Economic Research (NBER), a private economic research organization, economic recession is defined as "a significant decline in economic activity spread across the economy, lasting more than a few months (usually two consecutive quarters), normally evidenced in real GDP, real income, employment, industrial production, and wholesale-retail sales (indicators measuring the economic well-being of a nation)". However, for the purpose of explaining how economic recession occurs, the real GDP will be used in this breakdown because real GDP gives information about the size of an economy and how well an economy is performing. When real GDP is growing strongly, employment is likely to be increasing as companies hire more workers for their factories and people have more money in their pockets (real income). From the elementary Economics in our secondary schools, GDP is calculated as:
GDP = Household Consumption (C) + Business Investment (I) + Government Spending (G) + Exports (X) - Imports (M)

Breaking the formula down

(i) Household consumption (C)
As a result of the lock down in various cities across Nigeria, there has been an increase in the purchase of basic food items, which is expected to serve as a means of survival for individuals and their families in the lockdown period. However, there is a sharp decline in the consumption of other non-essential commodities and services such as Entertainment, Sports, Transportation etc. In in an online post by dailypost.com on May 2nd 2019, it predicted the unemployment rate is expected to be standing at a whopping 33.5 percent for the year 2020 which is without considering the effects of Covid-19 on the unemployment rate. This means more individuals are likely to lose their jobs and means of livelihood which indicates a likelihood of a further drop on Household consumption. when all of these factors are put together, Household consumption will likely end up with a negative figure.

(ii) Business Investments (I)
The new trend since the beginning of the Covid- 19 era is that a lot of businesses have embraced remote working environment for their staffs which has made some businesses invest heavily on IT. However due to the uncertainty that surrounds the future, a lot of businesses have suspended plans for major expansion, recruitment and developmental projects which summarily means that the private sector isn't pumping as much funds into the economy. Without enough investing activities from the private sector, business investment is also likely to end up in a negative figure.

(iii) Government Spending (G)
The major expenditure heads gulping majority of government funds presently are Health care, Citizen welfare etc. The income from crude oil, which is the major revenue earner for the government has encountered a sharp reduction, and with economic activities not moving at an optimal pace, other sources of Government revenue(Taxes, Business Incorporation fees etc.) are also suffering a sharp reduction.which ultimately means there will be lesser funds to embark on capital projects, developmental projects which will yield returns for the government and its citizenry in the long run. All of these factors highlighted above indicates that Government spending is likely going to end up negative.
(iv) Exports (X)
Nigeria’s major export is crude oil, and in recent times there has been a drop in the price of crude oil which means there is little income coming in from Nigeria’s major export and ultimately this means that figures from exports will likely be ending up in the negative as well

(v) Import(I)
Nigeria is highly import dependent, our major import partners(China, USA etc) are all currently on lock down which translate to low income from import duties and other import generating charges to the government. Due to the drop in revenue from import related activities, there will likely be a negative figure here too.

The addition of all these forecasted negative figures will likely put the GDP on a negative figure. If this trend continues for two consecutive quarters, there is the likelihood of the economy going into recession.




Effects of economic recession
According to an article titled “impact of economic recession” written by Tejvan Pettinger, the 2009 recession hit the financial sector the hardest. Many highly-paid ‘white-collar’ workers lost their jobs. Banks saw large-scale losses and falls in profit. It hit the housing sector very hard. However the effects of the 2020 recession is predicted to be different. Below are some of the expected effects of `the 2020 Recession.

(i) Increase in unemployment
Businesses are not making profit as they used to and as a result will need to cut certain costs so as to enable them at least break even. One of such decisions might be to downsize their workforce leading to job loss for many persons.

(ii) Increase in mortgage payment default
Due to job losses, individuals have limited income sources and will find it difficult to meet their day to day obligations. Also repayments of mortgage loans might become difficult which might lead to losing their homes which is financed through various mortgage loans facilities. Other effects include:

(iii) Increase in government borrowing
The Overall revenue of government has dropped as a result of the downward trend of economic activities. In order for government to continue running the economy, government will be forced to borrow from available sources and in the long run, the cost of servicing these debts might eat into government revenue which should be used for other developmental projects.

(iv) Increase in Liquidation rates.
Cost of doing business is expected to increase. With a lot of business not been able to cope with the rising cost of operating their businesses, they will eventually fold up and cease to exists.

(v)Increase in bankruptcy rates
Individuals who have invested and work for liquidated companies will loose their investments and means of livelihood. Individuals who has lost their means of livelihood might find it difficult to pay their debt obligations due to a decrease in their sources of income hence filing for bankruptcy.

Benefit of economic recession
The only benefit of an economic recession is that it helps in curbing inflation (that is, a persistent rise in the average prices of goods and services).

Tips for surviving Recession.
(i) Have an Emergency fund saved somewhere.
Recession comes with uncertainties and job losses are expected to happen as a result of these uncertainties. It is advised that an emergency fund, worth about three (3) months’ salary, should be saved to enable an individual cope in case of a job loss and other emergencies that might arise.
(ii) Develop a budget and cut down your debt.
Income sources are likely to shrink which might make it difficult to get enough fund to service your personal or business debts obligations. It is advised you develop a budget to cut down on some spending areas which might give you enough room to have some spare funds to meet your debt obligations.
(iii)Begin to practice a frugal lifestyle.
Living a minimalist lifestyle will never go out of fashion, it is very important to practice living a modest lifestyle when the recession hits. Living a modest lifestyle doesn't necessarily mean depriving yourself of the things you enjoy most in life, it is just basically making choices that reduces your expenses to the barest minimum. For example, a family having two cars with very high fuel consumptions level could go ahead and sell one of the cars to buy a car with a lesser fuel consumption level to save cost on fuel and servicing, instead of eating out which is most times very expensive you could decide to eat more at home etc.
(iv)Practice the customer first approach
The recession period is not a time to lose customers to your competitors. In order to keep your existing customers, who in the long run will bring new customers, doing everything to keep your customers satisfied should be one of your important priorities at this period. Satisfying your customers’ need will definitely attract new customers which translates to more sales and higher profits.

(v) Avoid unnecessary price cuts
Sometimes making unnecessary price cuts could entice more customers but in the long run, profit, which should be reinvested in making the business grow, is bitten into as a result of the price cut.which ultimately brings about a slow or Negative growth in your business which you will want to avoid at the recession period. Instead device a flexible payment plan for your customers to enable them pay over a certain period of time.

Written by: Akinfolarin Olugbenga K