One step away from recession

Thursday, 15 October 2020
Economy
One step away from recession
With mentions of recession circulating of late, TODAY sensitises on what Seychelles’ economy is actually going through. 2020 Q3 figures will determine whether or not Seychelles is truly in recession, however CBS has hinted at a high probability that the economy has already entered into that phase.
by A. Laporte
Based on official GDP (gross domestic product) statistics for the second quarter (Q2) of 2020, economic activity in Seychelles is in slowdown phase, evidenced by the statistics for real GDP which has decreased by 19.1% when Q2 of 2020 is compared to Q1 of 2020.
Central Bank of Seychelles (CBS) reports that it finds it important in the first instance to take a step back and explain what an economic cycle is. “At a point in time, countries experience fluctuations in the level of economic activity or overall level of output between periods characterised by growing activity and slowdown or contraction in total output. This is normally referred to as the Economic Cycle, or sometimes, the Business Cycle. The level of economic activity can be measured from compiled data on GDP; GDP refers to the total monetary value of finished goods and services produced over a given time period. A country’s quarterly GDP is one of the key indicators used to determine the stage of the economic cycle.”
The economic cycle is characterised by four main phases: boom; slowdown; recession, and recovery.
CBS explains, “Most economies tend to grow at a rate, which based on its historical records is considered as the long-term growth trend. A boom refers to the period where GDP growth is around its highest level above that trend. An economy that is in the boom phase would be characterised by increasing levels of income that supports higher demand for goods and services and therefore elevated expenditure level. As such, businesses have optimistic expectations due to growth in sales, which provides incentives to boost production through increased investment to meet stronger expected demand and thus, higher profits. This leads to the creation of more jobs and therefore declining unemployment. Overall, commodity prices, production costs – key of which would be wages – rise at a fast pace as demand for goods and raw materials increases. […]
An increase in unemployment and fall in income level are therefore experienced as workers are laid off and fewer jobs are available while businesses delay investment plans. At this point, the economy will be in the slowdown phase and growth in GDP will still be positive although at a decreasing rate.”
Note that, as aforementioned, Seychelles is currently in the latter phase. Because of the declared COVID-19 global pandemic, Seychelles and the world have experienced a halt in imports (and exports), the closure of businesses and other institutions, movement and travel restrictions, operational changes and expenses; and a total collapse of the tourism sector, consequently higher unemployment figures, have contributed to Seychelles’ economic slowdown.
As CBS explains further, “As the slowdown continues, the next stage of the cycle, which is Recession, is reached when the recorded growth in GDP turns negative. Technically, a recession is defined as two consecutive quarters (six months) of declining GDP. To note, a slowdown of the economy leading to a recession may also be triggered by other factors or ‘shock’ that adversely impact activity. This may include, for example, trade restrictions, war, and, similar to the current period, a global pandemic.”
Although officially, Seychelles has not reached a recession phase, the Central Bank admits, “[…] With most indicators suggesting a continuation of this trend (decreasing real GDP) during the third quarter, there is a high probability the economy has already entered into a recession. However, this conclusion cannot be made in the absence of official GDP outcome for the third quarter of the year, given that a recession is defined as two consecutive quarters of declining GDP. The National Bureau of Statistics (NBS) is expected to publish such data in December, 2020.”
One of the key developments that characterises the end of a recession or start of a Recovery is a return of business and consumer confidence in the economy. Hence, consumers increase spending and businesses start to invest as they become more optimistic. The resulted growth in demand encourages investment, increases production and builds up stocks. Subsequently, unemployment starts to decline as more workers are hired to increase production to meet growing demand. During a recovery, growth in GDP becomes positive and moves towards its long-term path.
CBS maintains that the current phase of the economic cycle should always be taken into consideration whenever policy decisions are made. “This is because policies that are implemented can impact the magnitude, length and phase of the economic cycle. When the economy is going through a slowdown or recession, expansionary policies that encourage consumer and investment spending are normally implemented. This can be achieved through a loosening of monetary policy, which reduces interest rates and therefore the cost of borrowing, making it cheaper to finance expenditure of both consumers and businesses. Spending can also be bolstered through an expansionary fiscal policy in the form of increased government spending and/or a reduction in the rate of taxes.”
Nearing an advanced stage of a recovery or boom, monetary policy is tightened (contractionary policy stance) to dampen consumer spending and investment. From the fiscal side, this can be supported by a lowering of government expenditure and higher taxes to reduce aggregate spending and slow down economic activity.

Source Today

http://sirop-cdu-alliance-snm.blogspot.com/2020/10/seychelles-pandemic-2020-general.html