Impact of economic recession on the manufacturing sector of the Nigeria economy 2010-2016

CHAPTER ONE

INTRODUCTION

1.1 Background Of The Study

In economics, a recession is a business cycle contraction which results in a general slowdown in economic activity. Macroeconomic indicators such as GDP (gross domestic product), investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. In the United Kingdom, it is defined as a negative economic growth for two consecutive quarters.

Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

A vibrant manufacturing sector has been acclaimed as a sure means of boosting economic growth and raising the standard of living. Nigeria as the giant of Africa has been regarded as the nation blessed with abundant resources; human and material. However, the underutilization of these potentials has amplified negative effects such as poverty, low level of standard of living etc. on the economy. In the modern world, the manufacturing sector is described as the basis on which the nation’s economic efficiency is compared, ranked and determined.

However, with the exploitation of crude oil in Nigeria in the early 1970s, the nation shifted from agriculture as a base for industrial development and placed a heavy weight on crude oil production. Not only has this jeopardized its economic activities, but also aggravated the nation’s level of unemployment because other sectors such as the manufacturing sector have been neglected. Nevertheless, the well-known developed economies have over the years adopted some initial tactical and favourable measures in pursuit of their economic growth and development through massive diversification of their resources into the manufacturing sector to enhance their Gross Domestic Product (GDP) capacity.

Manufacturing activities declined in Nigeria in the 1980s, as most companies were affected as a result of the global economic meltdown that further led to the closure of the industries as unfavourable conditions lingered, particularly for those industries which depend on importation to survive and had to spend more foreign currency on imported raw materials and spare-parts, and as a result of this, the sector has been termed a ‘neglected sector’.

Earliest manufacturing industries in the country were producers of different types of goods which comprised soap, cotton, steel, vegetable oil, meat products, dairy products, sugar refined, soft drinks, beer, cigarettes, textiles, footwear, wood, paper products, soap, paint, pharmaceutical goods, agricultural machinery, household electrical appliances, radios, motor vehicles and jewellery. There was an economic recession in the 1980s caused by the fall of the world oil prices on the market and so also in the foreign exchange rate which affected the economic growth and development of the country.

2.2 Statement Of The Study

1. Manufacturing industries were producing at below 50% capacity utilization
2. There was horrendous nosedive in stock market prices
3. Many manufacturing industries were closed as a result of economic recession
4. The shares of the closed manufacturing industries and those running at serious low capacity utilization were delisted at the stock exchange
5. There were low Foreign Direct Investment (FDI) and incredible shrinkage in capital investment
6. Production cost was very high due to high bank interest rate, high naira exchange rate to US dollar and powering of production plant during power outage
7. There was fall in commodity prices and many multinational companies like Dunlop plc and Michelin Plc relocated to neighboring countries where there is good economic climate for business

• Objective of study:

1. To research into the effect of Economic recession in manufacturing sector in Nigeria
2. To find out the most serious effect of economic recession in manufacturing sector in Nigeria
3. To compare the effect of economic recession in Afprint and Enpee textile manufacturing industries
   • Research questions:

The study did utilize the following research questions;

1. Why are some manufacturing industries closed down?
2. Why are the shares of some manufacturing industries delisted at the stock exchange?
3. What are the effects of economic recession in manufacturing sector?
4. What effect has economic recession in foreign direct investments in manufacturing industries?

• Statement of hypotheses:

The following hypotheses were also formulated to guide this study:

H0: Economic recession does not cause low capacity utilization and factory closure in manufacturing sector in Nigeria

HA: Economic recession cause low capacity utilization and factory closure in manufacturing sector in Nigeria

H0: Economic recession does not cause horrendous nosedive in stock market prices in manufacturing sector in Nigeria

HA: Economic recession cause horrendous nosedive in stock market prices in manufacturing sector in Nigeria

H0: The shares of closed manufacturing industries were not delisted at the stock exchange as a result of economic recession

HA: The shares of closed manufacturing industries were delisted at the stock exchange as a result of economic recession

H0: There were no fall in commodity prices and some multinational companies did not relocate to neighboring countries as a result of economic recession

HA: There were fall in commodity prices and some multinational companies relocate to neighboring countries as a result of economic recession

2.6 Significance of study:

• To know the effect of economic recession in manufacturing sector in Nigeria
• To know how to tackle the problem of economic recession
• To proffer advice

2.7 Scope of the Study

The scope of this study is centered on impact of economic recession on the manufacturing sector of the Nigeria economy 2010 – 2016.

2.8 Limitation Of The Study

The main constraints encountered in carrying out this research work, this includes;

1. Time Factor

This research work was conducted simultaneously with normal academic work within a short period of time in which some valuable information could be obtained.

1. Financial Difficulty

In an effort to have a sufficient research material to be able to write extensively on the subject matter, the researcher was faced with some financial predicament considering high cost of not only education materials coupled with the high transport fare.

2.8 Definition of Terms

Manufacturing:- is the production of merchandise for use or sale using labour and machines, tools, chemical and biological processing, or formulation.

Manufacturing Industries:- Manufacturing industry refers to those industries which involve in the manufacturing and processing of items and indulge in either creation of new commodities or in value addition.

Recession:- A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

Horrendous:- Extremely unpleasant, horrifying, or terrible.

Stock market:- A stock market, equity market or share market is the aggregation of buyers and sellers (a loose network of economic transactions, not a physical facility or discrete entity) of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange as well as those only traded privately.