What a difference half a century makes. If, that is, you’re not living in the U.S.
Are you doing better than the previous generation? The Pew Research Center, a nonprofit think tank in Washington, D.C., asked nearly 43,000 people in 38 countriesaround the globe that question this past spring. Residents in 20 countries said people like them were better off than they were 50 years ago. In Vietnam, 88% felt better off, followed by India (69%), South Korea (68%), Japan (65%), Germany (65%), Turkey (65%), the Netherlands (64%), Sweden (64%), Poland (62%) and Spain (60%). Overall, 43% of people in those countries said they were better off.
All told, a majority of respondents in these 20 countries said they were better off.
However, the U.S. wasn’t one of them.
The U.S. was among the other 18 countries in which people said they were actually worse off than half a century ago. In Senegal, 45% felt this way, followed by Nigeria (54%), Kenya (53%), the U.S. (41%), Ghana (47%), Brazil (49%), France (46%), Hungary (39%), Lebanon (54%) and Peru (46%). Venezuela, which has suffered from political unrest and economic turbulence in recent years, was last on the list. Some 72% people there said they felt worse off than 50 years ago (only after Mexico, Jordan and Argentina).
Why the disparity between these countries? In Europe, populists tend to be more enamored of the past than people who disapprove of some of the continent’s right-wing parties. Germans who support the Alternative for Germany party are 28 percentage points more likely to say that life is worse for people like them than those who have an unfavorable view of the anti-immigrant party, researchers found. Another trend: More educated people are likelier to say life is better today, and in some countries young people are more positive on life in 2017 than their elders.
“Some of the most positive assessments of progress over the past 50 years are found in Vietnam, India and South Korea,” the report found. “All societies that have seen dramatic economic transformations since the late 1960s, not to mention the end of armed conflict in the case of Vietnam. A majority in Turkey also share a sense of progress over the past five decades.” That said, Pew’s analysis indicates that views of the current economy are also a strong indicator of whether people say life for people like them is better today than it was 50 years ago.
In the U.S., the rich appear to be leaving the middle class behind. The American middle class made up just 26% of incomes in 2014, down from 46% in 1979, adjusted for inflation, according to a separate report released last June by the Urban Institute, a nonprofit and nonpartisan policy group. The upper middle class controlled 63% of all income in 2014, up from just 30% in 1979. And it isn’t because more middle-class Americans are richer: Middle-income households make up 120.8 million of the population, almost as much as upper middle-class and lower-income Americans combined.
Market history favors stock investors every year
There is precisely at 65.5% chance that U.S. stocks will be higher one year from today. Many investors will be happy with those odds, given that the stock market has been unexpectedly strong so far this year. But what they might not realize is that the odds of an “up” market in 2018 would be the same even if equities had been terrible performers this year.
In fact, the odds of a positive year are the same regardless of the conditions that prevailed in the previous calendar year.
That at least is what I found upon feeding into my PC’s statistical package the yearly returns for the Dow Jones Industrial Average DJIA, +0.29% since it was created in 1896. Of the 119 calendar years since then, the stock market has risen 78 times — or 65.5% of the time, on average. Following calendar years in which the stock market rose, in the next calendar year it rose in a statistically equivalent 65.4% of the time.
And, as you can see from the chart below, these are exactly the same odds that apply following years in which the Dow fell.
Why are the stock market’s odds of rising so impervious to what happened in the previous year? Actually, it would be surprising if this weren’t the case, according to Lawrence Tint, a chairman of Quantal International, a firm that conducts risk modeling for institutional investors. In an interview, he argued that what emerges from the data is exactly what we should expect from an efficient market — a market whose level at any given time reflects what is already known and therefore has incorporated past history.
If, instead, the stock market’s future direction was a function of what had come before, Tint continued, it would suffer from “unnecessary and unhealthy turmoil. We can be comforted by the fact that reasonably efficient markets always base their level on anticipated future returns, and do not include history in the calculation.”
This is particularly illustrated by the right-most bar in the chart, which reflects the market’s historical odds following years in which stocks gained more than 20%. That’s relevant to today’s situation, since the Dow’s year-to-date gain is around 22%. As you can see, however, the odds of the market rising in the years subsequent to such gains are no higher or lower than in any other year.
A good way to understand these results is to think of coin flipping: What are your odds of flipping a heads after flipping, say, five heads in a row? Those odds are no different than if you had flipped five tails in a row, of course. To think otherwise is to be guilty of what is known as the “gamblers’ fallacy.”
This isn’t to say that the stock market and coin flipping are equivalent. But playing the stock market over the short term is essentially gambling. It’s only over many years that considerations like valuation start to play a statistically significant role.
The bottom line? Optimists will latch on to the two-out-of-three odds of the market rising next year, and pessimists will focus on the one-out-of-three odds of its falling. Regardless of what does happen, the outcome will have nothing to do with how well stocks have performed this year.
U.S. probably gained 200,000 new jobs; watch the hard-hats
Global oil benchmark, Brent crude, hit a 28-month high on Monday as Saudi Arabia’s crown prince cemented his power over the weekend with an anti-corruption crackdown.
Brent, against which Nigeria’s crude oil is priced, rose by $2 to $64.07 per barrel as of 8:03pm Nigerian time, more than $19 higher than the country’s oil price benchmark of $44.5 per barrel for this year’s budget.
The Excess Crude Account, into which the country saves the difference between the market price of oil and the budget benchmark to provide a cushion when oil prices fall or extra cash is needed for spending on infrastructure, has suffered declines since oil price slumped in 2014.
The account, which stood at about $4.11bn in October 2014, dropped to about $3.11bn in November and $2.45bn in December that year, and declined further into 2015.
The balance in the ECA stood at $2.309bn as of September 27, 2017, according to the Ministry of Finance, while the nation’s external reserves rose to $33.93bn as of November 3, 2017, latest data from the Central Bank of Nigeria showed on Monday.
“The price rise is a reaction to the uncertainty from Saudi Arabia,” the Chief Executive Officer, Sun Global Investments, Mihir Kapadi, told The Guardian.
Other factors have edged the oil price upwards. Saudi Arabia, Russia, Kazakhstan and Uzbekistan met over the weekend and said they were willing to maintain restrictions on oil production, to address a glut in supply and prop up prices.
The United Arab Emirates and Iraq have also said they would back an extension to production curbs, which were due to end in March 2018.
Meanwhile, Nigeria has expressed support for an extension of a deal between the Organisation of Petroleum Exporting Countries, Russia and other non-members to cut oil supply until the end of 2018 “as long as the right terms are on the table” regarding its own participation.
The Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, said there was growing agreement among other members of OPEC to extend the deal.
“There isn’t any reason to change what is a winning formula,” he told Reuters, adding, “There is a consensus to extend. The issue will be the duration.”
Nigeria itself, however, is exempt from the deal.
OPEC, along with Russia and nine other producers agreed to cut oil output by about 1.8 million barrels per day until March 2018 in an attempt to ease a global excess that weighed on prices.
Economic structure – The primary sector remains the base of the Nigerian economy as agriculture provides the main source of livelihood for most Nigerians. According to the Food and Agricultural Organisation (FAO), Nigeria is the continent’s larger producer and consumer of rice, with this crop generating more income for Nigerian farmers than any other cash crop in the country. The secondary sector produces the oil that Nigeria is known for: it is the largest crude producer on the continent and holds reserves of 37 billion barrels. Oil production generates around 95% of export revenues and around 70% of government revenue. The country’s largest manufacturers produce cement, food products and consumer and household goods. The tertiary sector has big retail, transport, telecommunications and finance components. The continent’s most populous nation has seen robust growth in mobile communication as competition and regulatory measures lowered prices in the mobile sector. Retail spending is under pressure at present from high inflation and unemployment.
Economic growth – Nigeria will return to positive real GDP growth in 2017 following slower growth in 2015 and a contraction in 2016. The sluggish growth is mainly attributed to the inadequate supply of foreign exchange, foreign currency restrictions targeted at a list of 41 imports, cuts to oil production due to security challenges in the Niger Delta and the impact of lower oil prices on employment in the hydrocarbon sector. Furthermore, lower oil prices and disruptions to local production hurt the oil sector, on which Nigeria relies heavily. The oil price fell from an average of $99.50/bbl in 2014 to $56.30/bbl in 2015 and $41.10/bbl in 2016. The forecast improvement in economic growth in 2017 is still far from the growth previously seen in Nigeria.
Foreign investment – The National Bureau of Statistics (NBS) reported recently that total foreign investment inflows dipped by $4.52 billion (47%) to $5.12 billion in 2016 – the lowest in nine years. The NBS declared that foreign direct investment (FDI) declined by a less severe 28% as direct investors often take the long-term outlook into account. This means that Nigeria’s recession and currency problems may carry less weight in FDI investment decisions. According to BMI, the value of FDI relative to the size of the Nigerian economy remains low and the country’s acute energy, security, and foreign currency liquidity challenges could lead to a significant slowdown in FDI inflows over the medium term.
External trade – Nigeria has traditionally recorded a current account surplus that relied on its strong oil export revenues. The current account surplus averaged 8% of GDP in the decade ending 2014. Following the oil price collapse in the second half of 2014, the current account was in a deficit in 2015 for the first time since 2002. The macroeconomic challenges in Nigeria lead to some controversial policy responses where the government decided to maintain the exchange rate peg and impose capital controls – the associated sovereign ratings downgrade caused the delisting of Nigeria’s bonds on JP Morgan’s Government Bond Index Emerging Markets in 2016. The current account position will improve only slightly in 2017, remaining in low positive figures as oil revenues start to normalise.
Fiscal policy – Nigeria’s fiscal balance changed from a surplus in 2012 to a deficit in 2013, from where it continued on a downward trajectory. However, the deficit is expected to reach a turning point at 5.5% of GDP in 2017. Further devaluation of the naira is essential for a return in foreign investment – yet monetary policy will determine whether this will take place. As both oil prices and production rise, the government will be able to use fiscal stimulus to help the economy recover. Because of this, implementing an expansionary budget in 2017 would have a larger impact than in 2016. Fiscal policy will play and increasingly powerful role in growth recovery in Nigeria form 2017 onwards.
Monetary policy – Headline inflation decreased from 17.8% y-o-y in February to 17.3% y-o-y in March. The expectation is that the CBN is expected to maintain its interest rate at 14% throughout the rest of 2017: government pressure to support growth will prevent an interest rate hike. In March, the central bank’s Monetary Policy Committee (MPC) held rates constant for the fourth consecutive meeting – showing renewed consistency in its approach compared to previous years. Finance minister Kemi Odeosun has publicly called for lower rates that will stimulate the economy and make government borrowing cheaper, but the CBN has publicly resulted this and we do not expect this to change as long as inflation remains at current high levels. High inflation will therefore prevent a rate cut in 2017.
Inflation overview – Headline inflation decreased from 17.8% year-on-year (y-o-y) in February to 17.3% y-o-y in March. The central bank’s Monetary Policy Committee (MPC) held rates constant for the fourth consecutive meeting. Finance minister Kemi Odeosun has publicly called for lower interest rates in order to stimulate the economy, though the Central Bank of Nigeria (CBN) has refused this. Growth summary – Nigeria will return to positive real GDP growth in 2017 following and a contraction in 2016.
The sluggish growth last year is attributed to the inadequate supply of foreign currency, foreign exchange restrictions targeted at a list of 41 imports, cuts to oil production due to security challenges in the Niger Delta and the impact of lower oil prices on employment in the hydrocarbon sector. Economic policy – The federal government launched its Economic Recovery and Growth Plan (2017-2020) during April.
The scheme will act as a roadmap for security improvements, the war against corruption and economic revitalisation, and includes sectoral plans for agriculture, energy, transport, industrialisation and social investments. An economic growth goal of 7% has been set for 2020.
S&P Global Ratings affirmed Nigeria’s long-term foreign sovereign credit ratings at “B” in March 2017, with a stable outlook. Economic growth is expected to improve amid increasing oil production. The country’s low level of economic wealth, real GDP per capita below its peers and the highly centralised political environment has constrained Nigeria’s rating to a certain extent. Low general government debt and modest fiscal deficits supported the ratings. S&P may lower the sovereign’s ratings if the fiscal and external accounts deteriorate further or if the financial sector undergoes greater stress than expected. The sovereign’s ratings may be raised if economic growth increases more than expected and if forex controls on current and capital account transactions are eased, which enhances monetary flexibility.
Fitch Ratings revised the outlook on Nigeria’s ratings from stable to negative in January 2017, while affirming its “B+” rating. The changed outlook came amid concerns that a lack of foreign exchange will hamper the economy. Currently the spread between the official rate and the parallel market rates for forex is large, and until the Central Bank of Nigeria (CBN) can bring this spread down and simultaneously establish the credibility of the interbank forex market, forex will remain severely restricted.
Moody’s Investors Services affirmed its “B1” long-term issuer rating of Nigeria in December 2016, with a stable outlook. The key drivers behind this affirmation was that the country’s medium term growth prospects remained robust despite the challenging environment currently being experienced, and that the government’s balance sheet remains strong in comparison to its peers and resilient to the contractionary environment. Positive pressure on Nigeria’s rating could occur via the successful implementation of structural reforms by the Buhari administration, a strong improvement in institutional strength (with respect to corruption and government effectiveness and the rule of law), and through the rebuilding of large-enough financial buffers to shelter the economy against an oil price and production volatility period. The “B1” issuer rating could be revised downwards in the event of a larger-than-expected deterioration in the government’s balance sheet or lower-than-expected growth in the medium term.
The 2017 Budget is intended to expand PPP and partner with development capital, to leverage and catalyse resources for growth. Other key objectives of the Budget include:
a. Focusing on the rapid development of infrastructure such as roads, railways, power, information and communications technology, etc., that have quick positive effects on the economy.
b. Utilising Special Economic Zones and Industrial Parks as vehicles to accelerate domestic economic activity for innovation and wealth creation.
c. Contributing to f ood security and creating platforms for agro-business in agriculture supply chains through the Agriculture Green Alternative Plan.
d. Establishing a new Social Housing Fund to deepen the mortgage system and expand its availability across all States of the Federation.
e. Encouraging and stimulating the growth of small and medium scale industries for innovation, job creation, productivity and wealth creation.
f. Achieving self-sufciency in food and other products, and patronising made-in-Nigerian goods and services.
g. Reviving Nigeria’s fertilizer blending plants to ensure that local inputs for agriculture, such as NPK fertilizer, are available and affordable.
h. Recapitalising the Bank of Industry and Bank of Agriculture with Ö15 billion.
i. Stabilising and creating coherence in the monetary, scal and trade policies of the nation.
j. Diversifying the economy and creating more jobs.
k. Enhancing public service delivery and security.
l. Providing social safety nets for poor and vulnerable Nigerians.
Interestingly, there are no significant changes to tax and regulatory policies in the 2017 budget proposals. However, Government intends to broaden the tax base, improve the effectiveness of the revenue-collection agencies and tax compliance. Consequently, audit activity will increase across the board; with particular focus on transfer pricing. The highlights of the budget as regards tax are as follows.
The Medium Term Expenditure Framework (MTEF or “the Framework”) highlights the FG’s envisioned policies that will restructure Nigeria from recession to a path of sustainable growth over the next three years. The Framework seems to consider current realities with a view to achieving macroeconomic stability. The key assumptions underlying the MTEF are as follows.
To achieve the above projections, the FG proposes the following objectives:
i. Enabling business environment to boost investors’ condence. This would happen by lowering cost of business and improving living conditions of Nigerians.
ii. Continued adoption of the zero-based budgeting (ZBB) system introduced in 2016. This will ensure that only projects and programmes, which align with the FG’s economic priorities, are executed.
iii. Evaluation and strengthening of frameworks for concessions and public-private partnerships (PPPs) for the purpose of bridging the country’s infrastructure gap. This is classied as one of the FG’s priorities as the Government cannot nance infrastructural investment alone. The PPP will focus on key projects (such as railway construction and power generation) in order to create an enabling environment for business in Nigeria.
Reform in the oil and gas sector. This will include creating a competitive business environment for enhanced exploration and exploitation of petroleum resources, promoting local content, protecting health and environment, and increasing gas production. v. Improved revenue mobilisation from non-oil sector.
vi. Continuation of the public nance management reforms to enhance accountability and transparency. To achieve these objectives, projects such as the operation of the Integrated Personnel and Payroll Information System, compliance with the International Public Sector Accounting Standards, and continuous audit of government expenditure are to be rigorously pursued.
vii. Diversification of the economy. The focus will be on the small and medium enterprises in the mining and agricultural sectors.
viii. Sustainable debt management which remains within the statutory threshold of 3 percent of GDP as stipulated by the Fiscal Responsibility Act, 2007.
Nigeria depends signicantly on oil exports for its foreign exchange earnings. The sharp decline in global oil prices in 2015 and 2016, therefore, hampered foreign exchange supply in the country, whilst demand remained strong. This put signicant pressure on the nation’s exchange rate. The CBN maintained a xed exchange rate of Ö197:US$1 for the rst half of 2016, defending the Naira with a signicant portion of the country’s foreign reserves.
The CBN’s Monetary Policy Rate (MPR) was the principal instrument used in controlling the direction of interest and ination rates in the economy in 2016. In January 2016, the Monetary Policy Committee (MPC) of the CBN reduced the rate from its 2015 level of 13 percent to 11 percent. However, it was increased to 12 percent in March 2016, and 14 percent in June 2016. Throughout the second half of 2016, the MPC maintained the MPR at 14 percent in order to control inationary pressure amid foreign exchange scarcity.
The increase in MPR in 2016, amongst other factors, resulted in an uptick in the interest rates charged by deposit money banks during the year, with the prime lending rate and maximum lending rate averaging 16.87% and 27.29%, respectively 6 . The high interest rates in the country have continued to stie business and economic growth, especially in the real sector of the economy. In respect of external sector statistics, FDI and FPI continued to dwindle in 2016, relative to prior years. This is largely attributable to the depressed state of the economy and Nigeria’s foreign exchange challenges.
The 2016 Budget of Change had a total expenditure outlay of Ö6.06 trillion, and was anchored on an average crude oil price of $38 per barrel, oil production of 2.2 mbpd and an exchange rate of Ö197:US$1. The projected decit was Ö2.2 trillion or negative 2.14 percent of GDP. The implementation of the budget was expected to ensure real GDP growth of 4.3 percent, whilst keeping ination rate at 9.81 percent. Sadly, this was not to be, as the above economic indices clearly show. As at 30 September 2016, the FG had achieved only 75 percent of its target revenue and 79 percent of its target expenditure, compared to the 2015 revenue and expenditure implementation rates of 80% and 94%, respectively. The under-achievement of the 2016 Budget was generally due to late passage of the Appropriation Bill, revenuegeneration challenges, and government bureaucracy and inefciencies. These issues need to be addressed swiftly and decisively by the FG if the 2017 Budget of Economic Recovery and Growth will be more than a buzzword.