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How Germany, Canada, Spain came out of recession

Nigerian President, Muhammadu Buhari, Spanish Prime Minister, Mariano Rajoy, German Chancellor, Angela Merkel and Canadian Prime Minister, Justin Trudeau

THE National Bureau of Statistics (NBS), on Wednesday, released the Gross Domestic Product (GDP) figures for the second quarter of 2016. Expectedly, the growth rate slid further from -0.36 per cent in the first quarter to -2.06 per cent year-on-year. The negative growth rate confirmed the predictions that the country was heading into recession.

The report was, however, not damning, as the economy grew marginally by 0.82 per cent, when compared with the figure of the first quarter, revealing signs of early recovery.

A recession is defined as a significant decline in activities across the economy, lasting longer than a few months, with a technical indicator as two consecutive quarters of negative economic growth by the country’s GDP. It is a period of temporary economic decline during which trade and industrial activity are reduced. In economics, a recession is a business cycle contraction which results in a general slowdown in economic activity. Macroeconomic indicators such as GDP, investment spending, capacity utilisation, household income, business profits and inflation fall, while bankruptcies and the unemployment rate rise.

A severe (GDP down by 10 per cent) or prolonged (three or four years) recession is referred to as an economic depression, although some argue that their causes and cures can be different. As an informal shorthand, economists sometimes refer to different recession shapes, such as V-shaped, U-shaped, L-shaped and W-shaped recessions.

One good news, however, is that there have been countries who were once in recession and now, their economies have bounced back.

With the attendant impact of the recession on Nigeria’s economy, resulting in hike in prices of commodities and devaluation of naira, the Federal Government is still optimistic that its diversification processes are yielding results.

Reacting to the NBS data, the Ministry of Budget and National Planning noted that the picture pointed to the fact that agriculture and solid minerals sector are beginning to respond to policy initiatives, a reason the economy grew by 0.82 per cent.

The Eurozone recession dated from the first quarter of 2008 to the second quarter of 2009. In the Eurozone as a whole, industrial production fell 1.9 per cent in May 2008, the sharpest one-month decline for the region since the exchange rate crisis in 1992. European car sales fell 7.8 per cent in May compared with a year earlier, retail sales fell by 0.6 per cent in June from the May level and by 3.1 per cent from June in the previous year. Germany was the only country out of the four biggest economies in the Eurozone to register an increase of activity in July, though the increase was sharply down. Economic analysts raised the risk of the Eurozone entering a recession in 2008 and, in the second quarter, the economy was reported to have declined by 0.2 per cent.

What do countries that weathered the great recession better than others have in common? They got in better shape before the crisis struck.

 

Germany

Reunification meant great opportunity for Germany, but it also meant a prolonged period of economic weakness. The fiscal and structural reforms lawmakers made in response continue to pay dividends to this day.

In the early 2000s, Germany embarked on a pro-growth deficit-reduction course, coupled with structural labour market reforms. It lowered income taxes to improve growth and implemented critical labour market reforms to improve work incentives and boost manufacturing productivity.

To reduce the costs of its public pension programme, it increased the statutory retirement age, eliminated early retirement clauses and changed the way it calculated pension payments. Germany also adopted cuts to public-sector pay, including Christmas-related extra payments, while the country also reduced subsidies for specific industries.

This approach gave Germany the strong foundation it needed to weather a worldwide economic slump that hit Europe particularly hard.

Across the globe, countries that followed this model, emerged in a better shape than countries that failed to enact necessary reforms, according to a new report from The Heritage Foundation.

“Countries that exercised fiscal responsibility and reformed entitlements before the Great Recession had far more policy flexibility during the crisis and were less likely to suffer a severe or prolonged slump,” said Salim Furth, the main author of the report.

The Heritage study looked at data on fiscal policy in Europe since 2007. It revealed a variety of lessons policymakers in Europe, the United States and elsewhere can benefit from.

During the recession, Germany benefitted from an alternative to expanded unemployment: Kurzarbeit. Kurzarbeit is a federal subsidy that makes up a portion of lost pay for workers whose hours are temporarily reduced during cyclical reductions in demand. Its purpose is to encourage employers to retain trained staff so that production can recover more quickly in response to recovering demand.

By keeping workers on staff during the recession rather than laying them off, German producers could rapidly take advantage of rising demand when the global economy improved. Government intervention comes with costs and unintended consequences, but given the choice between expanding unemployment benefits or temporarily reducing workers’ hours, the latter proved successful within the German context.

Although large bailouts and stimulus efforts during the recession steeply increased Germany’s national debt, the country responded by adopting a Swiss-style debt brake and a spending-cut-heavy budget to get there, suggesting a commitment to control spending and debt moving forward.

Although Germany faces headwinds ¬  its economy is still less free than the United States and its demographic challenges are even more severe – the experience of the European powerhouse during the recession shows that preparation is key to weather crises.

 

Canada

That Canada fared considerably better than the balance of countries hit by the financial crisis is commonly accepted. As noted in The Economist, by 2010, Canada had already been well into recovery from one of its mildest recessions on record, while the rest of the developed world was struggling to keep from plunging headlong into economic chaos. Statistics Canada reported that Canada’s recession was the shortest and mildest among the countries that make up the G7, lasting only three quarters as compared to between four and six quarters in the rest of the group, and output, as measured by GDP, falling by 3.3 per cent from third quarter 2008 to third quarter 2009.

Canada’s GDP has since been on an uninterrupted run of consecutive quarterly increases, capped recently by an annualised rate of 3.9 per cent reported for the first quarter of 2011, after posting an overall rate of 3.3 per cent for 2010.

Under the joint leadership of Prime Minister Jean Chretien and Finance Minister Paul Martin, Canada underwent one of the most fiscally responsible periods in its history. Debt reduction was a goal that figured prominently throughout the years of the Chretien administration and in the subsequent years of the finance minister’s administration. Taking power as Canada’s debt levels were hitting record levels, Martin made it clear from the start that the priorities of the government would be fixed squarely on eliminating the deficit and the record of the following decade leaves little doubt that this was a commitment that was delivered upon powerfully.

Martin went to great lengths to bring the public on board, televising the lobbying efforts of interest groups and publishing dire reports on Canada’s fiscal situation, and then embarked on what was in all probability the greatest reduction in government spending ever undertaken in Canada from its inception.

Following a peak deficit of $42 billion in fiscal 1993 and 1994, the administration managed to reverse the deficit and produce a surplus by 1997 and 1998, and sustain the surplus over the following two years before posting a historical record of $17.1 billion in budgetary surplus in fiscal 2000 and 2001.

From that point, the government was able to produce a surplus every year up to 2007 and 2008, at times finding itself alone among G7 administrations in doing so. This was a period during which several significant tax cuts were implemented, including a $58 billion tax-cut package in 2001, alongside the re-introduction of inflation indexing for personal income taxes. This paralleled the experience in the provinces, which themselves were able to achieve budget balance in the aggregate by 2000, while concomitantly applying substantial cuts in personal income and corporate tax rates.

 

Spain

After years of being one of Europe’s shakiest economies, Spain managed to institute strict reforms and bring back economic growth.

It was exports, and not domestic demand, that lifted Spain out of the worst economic crisis since the civil war in the 1930s. During the crisis, Spain copied the German economic model, successfully putting its emphasis on exports. In 2014, almost one third of Spanish goods and services were shipped outside of the country, 25,000 new jobs were created in the Spanish car factories of Opel, Seat, Renault, Ford and Nissan alone. Once the unions consented to making production more flexible, Mercedes invested €190 million ($208 million) in the factories.

The European Central Bank predicted that Spain will be one of the economic drivers of Europe in 2015. Powered by a cheap euro and low interest, economic growth was predicted to rise by 2.3 per cent in the year.

Along with Portugal and Ireland, Spain represents an example of how an economic crisis can be turned into an opportunity. These countries’ experiences show that a nation can recover its economic competitiveness through painful reform, even in a monetary union.

Between 2008 and 2013, the financial crisis years, Spain’s Martinsa-Fadesa, a construction company, declared bankruptcy after failing to refinance a debt of €5.1 billion. The two banks with most exposure to Martinsa-Fadesa were reportedly Caja Madrid, at €900m, and Banco Popular Español, at €400m. Spain’s finance minister Pedro Solbes said it would not bail out the company. In the second quarter, house prices in Spain fell 20 per cent.

Spain’s premier, Jose Luis Zapatero, blamed the European Central Bank for making matters worse by raising interest rates. More than 98 per cent of home loans in Spain are priced off floating rates linked to Euribor. Housing accounts for over 10 percent of Spain’s economy. The Bank of Spain is concerned about the health of smaller regional lenders with heavy exposure to the mortgage market.

In the first half of 2008, unemployment in the country rose by 425,000 over 2007 and 2008, reaching 9.9 per cent. Car sales fell 31 per cent in May. Spain’s factory output slumped 5.5 percent in May 2008. Spain had a 7.9 per cent decline in retail sales in June compared to the previous year, the largest drop since Spain began registering the results and the seventh consecutive monthly decline. This included a 17.9 per cent drop in retail sales of household goods. June food sales in Spain fell by 6.8 percent.

“After the introduction of the euro, our inflation was always two or three per cent higher than Germany’s. So after 2000, our competitiveness on the international markets sank,” says Nadal, a Harvard University graduate. At first, the cheap money from the ECB and a big real estate boom plastered over the country’s problems. Then in 2008 came the big real estate market crash and Spain was trapped.

Back when the Spanish peseta was still in use, the country’s currency could still simply be devalued, the country had again and again been able to retain its competitiveness in previous decades. But when the crisis broke out, this exit strategy was off-limits: Spain would have had to leave the euro to use it.

Spain decided to take the more difficult road. “We are the first population-rich country that embarked on a large-scale depreciation within a currency union,” Nadal says.

Taxes were raised in 2011 and many people were laid off, including those in the public administration. This led to mass unemployment, a plunge in real estate prices of over 35 per cent, wage stagnation and at some point, prices also started to sink.

“For the past 18 months, inflation has been lower than in Germany. That had never been the case before,” Nadal says.

Thanks to its restraint on wages, Spain managed to completely regain the competitiveness it had lost relative to countries like France and Italy since 2000. Even the gap between Spain and Germany rapidly shrank.

It is still almost impossible for young Spaniards to get a permanent job in their homeland. In some places, temporary contracts are as valuable as a winning lottery ticket. University graduates are more likely to find an adequately paying job in Antwerp, London or Frankfurt. Even Prime Minister Rajoy — who, as a politician, is professionally required to be optimistic — is proceeding on the assumption that five more years of economic growth will be necessary for 20 million Spaniards to have a job, as was the case before the crisis.

During the crisis, the construction industry lost about 1.8 million jobs. Given the many empty apartment buildings, in 2014, after falling by about 35 per cent, apartment prices once again rose nationwide.

Reassuring Nigerians that the economy will come out of recession soon, the Ministry of Budget and National Planning, in a statement by James Akpandem, media adviser to the minister, Senator Udoma Udo Udoma, said although the inflation remained high, the good news was that the month-on-month rate of increase had fallen continuously over the past three months.

For the rate of unemployment, which still remained high, it explained that the issue was of a structural nature and usually the case during growth slowdown, adding that “it is expected that the social safety net initiative will slow down the unemployment rate before the end of the year.”

While defending the policies of the Federal Government on the economy, the Minister of Finance, Mrs Kemi Adeosun, after the meeting of the Federal Executive Council (FEC), on Wednesday, said the country was experiencing the worst possible time, but the government is not confused.

“We have to invest in capital projects… We know that if we can just bear and get through this difficult period, Nigeria is going to be better for it. If we rely on oil and the price of oil remains low and the quantity of oil remains low, we can’t grow. We have to grow our non-oil economy.

“It’s a difficult time for Nigeria, but I think Nigeria is in the right hands and if we can stick with our strategy, we will be better for it. We still have some adjustments to make. I think we need to make some adjustments in monetary policy. It’s quite clear we do and we will do that.”

Also on Thursday, President Muhammadu Buhari said amid the current challenges, which, he said, was temporary, Nigerians can only witness positive change through perseverance and patience. He said the people must be ready to make sacrifice as the administration was committed to improving the welfare of the citizenry.