BoG index points to economic contraction

Data released by the Bank of Ghana last week suggests that the national economy has entered a contraction phase right from March, the first month in which Ghana confirmed cases of coronavirus and began taking measures to curb its spread, but which inevitably also curb economic activity as well.

The central bank’s Composite Index of Economic Activity recorded its first ever year on year contraction in real terms, of 2.2 percent for March 2020. Instructively, in February, immediately prior to the arrival of COVID 19 in Ghana, the CIEA grew by 7.1 percent, year on year. The contraction in March is a reverse of the 5.6 percent growth recorded in March 2019. Indeed in 2019, the slowest growth in the CIEA was recorded in August, at 3.6 percent while the fastest growth was in December, at 14.0 percent.

Unlike Gross Domestic Product growth, as measured by the Ghana Statistical Service, which tracks growth in economic value in the economy, the BoG’s CIEA measures changes in the level of economic activity.

While the two produce different results in quantitative terms, they are correlated with regards to direction, since it is economic activity that generates economic value. Thus growth in the CIEA as announced by the BoG has always been matched by growth in GDP, which is released later by the GSS.

The possibility of a recession in Ghana as a result of the coronavirus outbreak is real, albeit unlikely, with both the central bank and the finance ministry admitting to the possibility in a worst-case scenario.

However, the latest data from the BoG are the first actual statistics that confirm the forecasts of economic contraction.

But the contraction in economic activity in March does not automatically signal an impending recession. By definition economic growth has to be negative for three successive quarters to be called a full-blown recession and in this regard Ghana still has a long way to go.

Although the economic contraction in April is certain to be even worse than that for March, because of the lock down in Accra, Tema and Kumasi, economic activity has begun slowly picking up since the beginning of May. Indeed, the BoG still expects Ghana to record positive growth rate for 2020, of between 2.0 and 2.5 percent.

Before the arrival of coronavirus in Ghana the country had been enjoying a strong run of economic growth since 2017, of between six and eight percent annually, and this provides the foundation for a quick recovery in economic activity, if the viral spread can be brought under control without further resort to needed draconian measures which seriously curb economic activity too.

The World Bank, the International Monetary Fund and the African Development Bank all predict negative economic growth in 2020, both on a global and pan African level. Indeed, sub-Saharan Africa is expected to enter its first economic recession in 25 years.