EFFECT OF ECONOMIC RECESSION ON THE GROWTH OF CONSTRUCTION FIRMS IN ABUJA, NIGERIA

ABSTRACT

Economic recession occurs when “economic activity declines, in other words, growth become negative “and it is associated with low- level consumer spending. A recession also known as go-slow in terms of Gross Domestic Product (GDP) or national outputs has led to increase in unemployment, a decrease in wages, a high level of inequality, and an increase in government borrowing. Fall of Nigerian currency, so much reliance on oil, and lack of diversification led Nigeria to two consecutive quarters of negative economic growth,  which  is  recession.  Economic  recession  has  badly affected  the  construction industry so much that there is hardly any new projects coming on stream; cranes are lying idle throughout the country and many newly constructed facilities remain unoccupied. This has resulted into redundancy in Nigeria’s construction industry while many construction firms have practically laid off their staff. The aim of the study was to evaluate the effect of economic recession on the growth of construction firms in Nigeria with a view to strengthening them against the effect of economic recession on the Nigerian construction industry. The quantitative research approach was adopted with use of questionnaire survey employed to collect data from 22 construction firms registered with Federation of Construction Industry (FOCI). Archival data were also collected from World Bank and CBN bulletin. Data collected were analysed with the use of Relative Importance Index (RII) and Regression Analysis. It was also shown that “Job Loss” is the most significant effect of economic recession (RII = 0.89). Seven (7) out of the eight (8) measures identified for preventing reoccurrence of economic recession, ranging from “Expansionary monetary policy – cutting interest rates” to “Higher Inflation Target” are very effective (RII = 0.77 – 0.68). Finally, it was revealed that a strong, negative and significant relationship exists between micro variables and number of employees of firms (p = 0.022; R2 = 57%). It was therefore concluded that economic recession has a significant negative effect on the growth of construction firms in Abuja, there was increase in unemployment. It was thus recommended that Government and construction firms should set up a mechanism for the effective implementation of the measures for preventing the reoccurrence of economic recession in the Nigerian construction industry.

CHAPTER ONE

1.0       INTRODUCTION

1.1       Background to the Study

Recession occurs when  “economic activity declines, in other words, growth become negative “and it is associated with low- level consumer spending (John et al.,2010).A recession also known as go-slow in terms of Gross Domestic Product (GDP) or national outputs  has  led  to  increase  in  unemployment,  a decrease in  wages,  a high  level  of inequality, and an increase in government borrowing, among other factors (Tejvan,2012). Gbeneye (2014) described economic recession as a period marked by a drop in stock prices, the closure of businesses, the reduction of consumer credit facilities, and the collapse of mortgage facilities. Recession, according to Lipsey & Chrystal (2011), is described as a “two-quarter drop in real GDP.”

The price of oil had dropped from $112 per barrel in 2014 to less than $50 per barrel prior to the global oil price drop in 2016; Nigeria’s economy was highly dependent on crude oil revenues, with steady inflows of Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI).

The National Bureau of Statistic (NBS) reported that oil sector produced 95 percent of Nigeria’s export earnings and 75 percent of government revenue (BBC News, 2016). According to the latest growth figures, Nigeria’s economy shrank 2.06% between April and June, 2015 indicating that the country has entered a recession. Apart from the oil company, the figure depicted the naira’s depreciation, which has harmed Nigeria’s economy. In June, it was allowed to float freely to aid the economy’s recovery, but the economy lacks sound policy, which is another factor contributing to the country’s recent recession (BBC News, 2016).

According to NBS (2012) a year after the country’s recession was declared, much thought had gone into identifying the causes of the downturn.  A lot of factors were to blame for the recession; some believe militants in the Niger Delta region have the upper hand in reducing crude oil output, which resulted in the recession. Nigeria’s construction industry contributed significantly to the country’s GDP. In reality, when compared when compared to the other sectors of the Nigerian economy, the construction industry is growing.

NBS (2012) stated that the construction industry contributed N54,613,264.18 million to real GDP in 2010, accounting for 2.88 percent of the total, or N1,570,973.47 million. The construction industry increased by 21.30 percent in 2011, reaching N1,905,574.90 million. The construction sector experienced a 14.86 percent slowdown growth, resulting in a total of N2,188,718.59 million in 2012.In the same year, construction’s share of GDP increases to 3.05 percent. As construction activities, the study included the construction of houses, bridges, railways, and civil engineering projects. Demolition, service project design, and site preparations are among the others.

The International Monetary Fund (IMF) and the Central Bank of Nigeria (CBN) concluded that Nigeria’s economy would be stable again in the first quarter of 2017, with a low growth rate of 1.5 percent (Noko, 2016). The recession problems can be solved with policies that make the economy more attractive to international investors. The policies include boosting foreign reserve, lowering port charges and other import duties, and promoting both domestic and foreign investment. As a result, the country’s economy will return to normal. This is the direction in which this research is going.

1.2       Statement of the Problem

The ongoing global economic and financial crises have raised a slew of concerns at every level of the economic policymaking process (Burger et al, 2009). In advanced countries, the government and emerging markets were forced to work together urgently on a variety of issues: politically sensitive economic sectors had to be bailed out, the overall economic downturn had to be reversed, and the vulnerable people had to be shielded from falling incomes. These costly steps were taken in response to declining government revenues, dwindling domestic and international financing, and long-term budget and debt implications (Burger et al., 2008).

The effect of global economic recession was felt by the banking sector, immediately there was withdrawal of credit lines by foreign bank, resulting to paucity of funds in the economy (Gbeneye, 2014). The stock exchange’s share prices went down the drain and investors run into heavy lose and can’t repay share purchased on loan (Ngwube & Ogbuagu 2011). The firm’s productive capacity dwindled, resulting in significant retrenchment and increase in unemployment level (Ngwube & Ogbuagu, 2014).

According to Ajanlekoko (2016), the building industry has been hard hit by the recession, with few new projects springing up and equipment’s laying idle and facilities unoccupied.

Liquidity management and bank loans are becoming too expensive to maintain as a result of narrowing both local and international financial market and also unwillingness of the public to invest on company’s share, resulting to the crash of the capital market (Owolabi & Obida, 2012). Due to a lack of currency, there would be a void in the trading cycle without adequate liquidity management during this time of economic recession. It will actually affect the profit margin of the contractor and retard the growth rate of construction firms.

1.3 Research Questions

In order to address the research problem, this study raised to the following questions:

i.      What are the effects of economic recession in the Nigerian construction industry?

ii.      What is the relationship between micro economic variables and the annual growth rate of construction firms in Abuja?

iii.     What is the relationship between some micro economic variables and construction GDP in Nigeria?

iv.      What are the strategies for reducing the effects of economic recession on the Nigerian construction industry?

1.4 Aim and Objectives

The aim of this research is to evaluate the effect of economic recession on the growth of construction firms in Nigeria with a view of strengthening the construction industry on the effect of economic recession. The following objectives are set to achieve the stated aim:

i.            To examine the effects of economic recession on the Nigerian construction industry.

ii.            To determine the relationship between micro economic variables and the annual growth rate of construction firms in Abuja.

iii.            To determine the relationship between some micro economic variables and construction GDP in Nigeria.

iv.            To examine the strategies for reducing the effects of economic recession on the Nigerian construction industry.

1.5 Justification for the Study

The aim of the study was to assess the effect of the economic downturn on the growth of Nigerian  construction  firms.  Insufficient  funds in  the system  reduced  the productive capacity of firms leading to massive retrenchment and dramatic increase in unemployment levels, the value of Naira was reduced drastically and construction firms can no longer manage the taxation. The effect of the economic recession in the Nigerian construction industry became so severe; such necessitates strategies for proper management.

1.6 Scope of the Study

The work addressed the effect of economic recession on the Nigerian construction industry using information to be obtained from construction firms within Abuja metropolis. The study covered construction firms in Abuja registered with the Federation of Construction Industry (FOCI). The study will cover a fifteen – year period (2004 – 2018).The information on GDP, interest and inflation rate was used to describe economic recession. The annual employee turnover and annual profit margin of construction firms are included in the growth of the company. A descriptive research survey was adopted and took a period of three (3) years (2017-2021).

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