Economic Environment of Business

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2008MBA035

ECONOMIC ENVIROMENT OF BUSINESS 1

TERM PAPER

QUESTION

Notwithstanding the public policy response to the economic recession, business performance will continue to deteriorate.

Global Overview

Recession can be defined as the reduction of a country’s gross domestic product (GDP) for at least two quarters. According to Wikipedia, it is a period of reduced economic activity, hence, a business cycle contraction. Recession has many attributes that can occur simultaneously. This includes decline in coincident measure of activities such as employment, investment and corporate profits.

It’s worthy to note that there is no commonly accepted definition of global recession. The international monetary fund (IMF) states that a global recession is that which causes a slowdown in global growth to 3%or less. The last period that qualifies for such since 1985 is 2001-2002. At such, the current recession affects a substantial number of nations as at early 2009. US entered a recession at the end of 2007 and many more nations followed suit in 2008.

August 2007, the inability of household to make higher payment on adjustable mortgage resulted in subprime crisis, tight credit standards of US financial institutions due to deteriorating balance sheets further resulted in widespread credit contraction. Loss of consumer confidence and precipitous decline in consumption caused sharp declines in economic activities as demand was generally low. These interplay threaten a recession because of increase in general prices, declining real output growth, weakened financial systems that resulted in bankruptcy and take over , loss of jobs through layoffs and downsizing of firms to reduce cost of operations and crash of stock market. The loss of confidence means inability of financial market to intermediate between the deficit and surplus sectors of the economy.

Fall in private consumption means that consumer confidence is low, and wealth eroded as a result of drop in values of houses, pension savings decimated in stock market. An estimate of 2.6million jobs were eliminated with 533000 lost in November 2008 alone. Few countries have seen rate of GDP growth decrease and this is generally attributed to liquidity, sectorial price inflation in food and energy. Hence most economies are experiencing slowdown in growth due to financial crisis

Bringing It Home

Nigeria is not isolated from the meltdown because of the ripple effects. The meltdown in global market is a global phenomenon and the character of volatility on the exchange is indicative of the global malaise. Oil which accounts for more than 90 percent of country’s income trades around $40 per barrel, down from its 2008 high of $145; Nigerian foreign reserve fell by $8 billion to $49billion at march 2009.

The cantankerous scenario is compounded by the fact that most Nigerian banks naively took collaterals of share certificate on loans to speculate in the stock market. The global financial crisis and economic downturn has impacted negatively on business economic environment by exposing consumers to shock because equity prices plummeted to an all time low. Market capitalization which determines equity values in the market dropped by 137.7 percent from an all time high of 12.6 trillion in mid march 2008 to 5.286 trillion at march 2009. Investors lost over 8 trillion naira within the last ten months thus raising fears among Nigerians that the market might not pick up in the near future.

In response to the looming financial crisis, a number of public policies have been put in place to mitigate the financial crisis. The aim of which is to stimulate aggregate demand and increase consumption. The various public policy response includes

Deficit budgeting in excess of 1.03trillion naira

Change from wholesale dutch auction system to retail dutch auction system.

Stimulus ppackage of $1.5billion to be shared among the 3 tiers to improve economy and pay...
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