The Central Bank yesterday down played the risk of economic recession in the wake of last week's post-election violence.

Governor Njuguna Ndung'u said no country ever goes into recession due to a single political shock as predicted by some economists.

He was reacting to an article published by the Business Daily yesterday quoting Professor Terry Ryan, a consultant at the Finance ministry, as saying that an initial assessment had found that the economy was likely to slow down significantly, dragging the growth rate to between two and 4.5 per cent in 2008.

" Let me say at the outset that countries do not go into recession due to a single shock, but rather due to persistent shocks that disturb the profile of policies, prices and the incentive mechanism," he said.

"In the past when the economy sunk into recessions they were related to volatile prices that made it impossible for entrepreneurs to calculate their returns or created a co-ordination failure preventing investors from undertaking investments."

"But the question to ask is what would trigger a recession in Kenya?" posed Prof Ndungu in a classic academic puzzle among professional economists, but one that now the former teacher and student must answer in a real world situation.

Since political violence over the disputed elections broke out last week, the persistent question that has been on the lips of many investors, managers and businesspeople is whether the Kenyan economy will weather the storm or descend into a recession.

Finance minister Amos Kimunya has put the damage at Sh60 billion and says it might take a year to recover.

Prof Ryan and other professional economists such as Dr David Ndii, who was among the brains behind President Kibaki's economic recovery plan, take a more pessimistic view of the country's outlook and the impact of the economic damage wrought by the post-election violence.

Then there is the falling investor confidence stemming from the political stand off that resulted from the poll dispute.

Dr Ndii believes that it is still too early to predict long term effects on the economy caused by the events in the last one week.

The governor however sees the current crisis as a temporary disruption to Kenya's long term economic growth trajectory which is already underway.

"However, the disruption (from the post-election violence) has only lasted a short period and it is not expected to have a major impact on GDP growth," he said, "The performance of the economy is therefore expected to remain robust.

The main issue is that this is a shock with negative effects - but since it will not persist, there will be a dip or blip in the growth profile or trajectory - but will not show a recession. The reconstruction in those affected areas will be a boost to growth fundamentals."

He said the most critical impact on the economy would be supply constraints that would trigger inflation in the short term.

There are examples in the foreign exchange market where the Kenya Shilling depreciated and the commodities market where disruption of supply networks are reported to have led to increase in commodity prices, he said, adding: "These are short term effects. The fundamentals in short are not affected by temporary shocks like the one that has taken place in Kenya."

However, the definition of whether there is going to be a recession is a controversial matter even among academics around the world such that even in developed economies like the US, the National Bureau of Economic Research (NBER) is mandated to track business cycles by the government.

A recession is generally defined as two quarters (six months) of contracting economic growth. In Kenya, there is no such definition or regular publication of quarterly GDP figures.

The NBER Business Cycle Dating Committee maintains a chronology of the US business cycles. The chronology identifies the dates of peaks and troughs that frame economic recession or expansion.

The period from a peak to a trough is a recession and the period from a trough to a peak is an expansion. According to the chronology, the most recent peak occurred in March 2001, ending a record-long expansion that began in 1991. The most recent trough occurred in November 2001, inaugurating an expansion.

NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." NBER says that a recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

Between trough and peak, the economy is in an expansion. "Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades."

According to Prof Ndung'u, a recession in Kenya can be sparked by several factors which include:

• Fiscal dominance: This means that the government borrowing would drive interest rates and so investors would find it difficult to invest since the rate of returns on investments is lower than the prevailing interest rates. In this way, the investors would hold down investment decisions.

The Kenya economy is driven by investments. A period had come where efficiency gains drove growth and this was supposed to be supplemented by a rollout of investment for next five years to raise growth to over 10 per cent in the Vision 2030.

"We do not see a chance of fiscal dominance, a characteristic of the 1990s coming back to Kenya and we do not see a high interest rate regime operational in Kenya," said Prof Ndung'u.

• Volatile prices: When prices are volatile for a long period, this affects the planning horizon and also prevents long term decisions.

• Credit crunch to the private sector.

• Market collapse so that prices cannot be predicted. If you go to the NSE and the foreign exchange market, they are able to tell you prices whose abundance or scarcity you can assess.

• Political Violence: Criminal and political violence: This can come with persistent shocks and violence and loss of property.

"What we see today has been seen before in 1992, 1997 and 2002, the problem is that they were not resolved," he said, "But these were in smaller scales. It needs to be resolved now to create future confidence rather than cycles of political violence attributed to political competition."

The governor who has written extensively on political violence in Africa and Kenya as an academic says that the post election conflict temporarily slowed down production activities in some affected areas and in some sectors countrywide.

"The economic history has also been kind to economic reconstruction and resolve by nationals to regain the lost glory," said Prof Ndung'u, "This is an anguished period for Kenyans and their pride."

--Additional reporting by Washington Gikunju