It is a good measure of economic activity in any economy and is a benchmark for Government Budgeting, income and expenditure, investment inflows in and out of an economy etc. The private sector also relies on the GDP of a country to determine which areas have robust economic activity helping them decide where to invest.
GDP Growth rate is the difference between the GDP of one period compared to the GDP of a prior period mostly over a year. When estimating GDP growth rates, economist adjust the values for inflation. Economists believe that countries that experience robust GDP growth rates over time will attract investments as it signifies a business opportunity for everyone.
On the flip side, countries that experience little or nor GDP growth rate are considered as either too large that there is little room for growth or are in a period of slow economic growth due to structural issues. Developed countries like the US and Germany usually have low single digit GDP Growth rates. A recession on the other hand is a sign that things are really bad with that economy.
A recession is thus defined as consecutive declines in quarterly real gross domestic product (inflation adjusted) and a decline in activity across the economy, lasting longer than a three to four months. It is visible in industrial production, employment, real income and wholesale-retail trade.
- GDP Decline – Consecutive declines in quarterly real gross domestic product below zero. For example if the real GDP of Nigeria declined in Q1 2016 into the negative and also declines or remains in the negative territory in Q2, Nigeria is in a recession.
- Decline in economic activity spread across the economy, in both the manufacturing and non-manufacturing sectors and lasting more than a few months. Production level, business activity, new orders, employment level and raw material inventories all decline at a faster rate.
- Decline in income and profits reported by businesses – Another very good sign of a recession is when publicly quoted companies mostly declare a drop in their revenues or profits. In fact, most companies post massive losses during a recession.
- Dip in Government Revenue – As explained, a dip in government revenue is also a very good sign that a country is sinking into recession. In Nigeria for example, we have seen government revenue dip so much that most states have to seek for a bailout to enable them pay for something as basic as salaries.
- Job losses – There are massive layoffs as most companies cut cost to remain afloat. Since consumer and government spending has dropped, businesses can no longer produce at same level and therefore cut back to remain in business. The National Bureau of Statistics revealed a few months ago that over 528k jobs were lost
- Inflation rate drops or gallops – Developed countries who experience a recession also record low inflation numbers. This occurs because both consumer spending and production drop simultaneously. However, in developing economies like Nigeria, reverse is the case. Because we mostly import, cost of goods and services sold locally increase forcing consumers to even spend less. In Nigeria, the drop in oil prices triggered capital outflows and then a loss in value of the Naira. This meant imported goods and services recorded a hike in prices. Nigeria’s inflation rate is currently 16.5, the highest since 2005.
- Companies go bust – Another major sign of a recession is that companies in key sectors of the economy such as manufacturing, financial services and insurance typically go bankrupt. Industries that also rely heavily on government expenditure suffer from a recession.