Macroeconomic Outlook Update: COVID-19, Global Oil Price and the Nigerian Economy


Monday, May 11, 2020 / 05:28 PM /By NESG / Header Image Credit: NESG


Review of the Global Economy

The outbreak of COVID-19 in China dampened China's economic outlook for the year 2020. Efforts to contain the spread of the virus has led to widespread movement restrictions and shutdown of industrial activities. The effect is evident in China's Manufacturing Purchasing Managers' Index (PMI), which slipped below the sectoral expansion benchmark of 50 points to 35.7 points in February 2020. This implies the growth figure that will emanate from China will significantly contract and therefore affect the global economy. The regimented movement of humans due to fear of contagion and the inability to secure vaccine continue to dampen economic activities. For the first time since 1992, the economy of China recorded negative growth in Q1'2020, a significant one decline at -6.8 percent down from 6.5 percent in the corresponding period of 2018 and 6.0 percent the previous quarter.

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However, China is no longer the main concern regarding COVID-19. In the last few months, the United States (US) and some countries in Europe have recorded higher numbers of reported cases and deaths. Most of these countries have implemented movement restrictions, lockdowns, among other measures, to contain the spread of the virus. These measures will have a negative impact on global economic growth in 2020.


Advanced economies would drag-down global GDP in 2020. Advanced economies led by the United States will be largely responsible for the significant decline in global Gross Domestic Product (GDP) in 2020 as a result of the COVID-19 pandemic. The International Monetary Fund (IMF) projected global GDP to decline by 3 percent, with countries such as the United States, Germany, United Kingdom and Italy recording significant output decline of 6.1, 7.0, 6.5 and 9.1 percent, respectively in 2020. In Q1'2020 alone, the US has posted a GDP contraction of -4.8 percent relative to 3.1 percent same period last year and 2.1 percent the previous quarter. Likewise, the European Union (EU) has reported slightly lower contraction of -2.7 percent while we await reports of others.


Meanwhile, emerging markets continue to feel the heat of the global pandemic. The economies of emerging markets and developing countries expanded by 3.7 percent in 2019, much higher than the global growth of 2.9 percent. Growth was largely driven by China and India, which recorded significant expansion of 6.1 and 4.2 percent respectively in 2019. With the outbreak of the virus, economic activities in emerging and developing countries have been subdued due to lockdowns, movement restrictions, lower foreign investment inflows and declining commodities prices, for those that rely on commodities exports. Subsequently, the IMF downgraded growth outlook for emerging and developing countries to -1 percent in 2020, from an earlier projection of 4.4 percent. Countries such as Nigeria, South Africa, Brazil, Mexico and Russia are projected to have a negative growth rate in the year 2020.


The manifestation of the impact of the pandemic is evident in the commodity market. Being the second-largest economy and consumer in the world, an economic slowdown in China means a significant decline in the demand for commodities. Particularly, the oil market has been badly hit. The WTI and Brent prices of oil have plummeted from US$61.33 and US$66.25 in the dawn of 2020 to US$18.84 and US$25.27 as of April 30, 2020.


Nigerian Economy in Challenging Times


Nigeria's economy is expected to contract in 2020 

The outbreak of the coronavirus pandemic with its attendant restriction on economic activities and severe impact on the oil market is set to reverse Nigeria's growth of 2.3% achieved in 2019. Already in the first quarter of 2020, the effect of the pandemic and the slump in crude oil price is evident on Nigeria's Purchasing Managers' Index (PMI), which tracks the performance of the business aspect of the economy. The Manufacturing PMI, though still on the expansionary benchmark, slid to 51.1 points in March 2020 from 60.8 points recorded in December 2019. On the other hand, the non-manufacturing sector contracted as its PMI slid to 49.2 points in March 2020 from 62.1 points recorded in December 2019. This suggests a significant slowdown in economic activities in Q1'2020.


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The lockdown of several states and the Federal Capital Territory (FCT) in the second quarter of the year will have an immense negative impact on GDP growth in the year. The three major GDP components - household consumption, government spending, private investment - were constrained during the lockdown effected due to the spread of coronavirus and are expected to perform poorly in full-year, relative to 2019. This is based on the high level of uncertainty over the pandemic as well as the fragility of the economy exemplified by the poor performance of major macroeconomic indicators.


In the NESG 2020 outlook report released in January, three scenarios were projected for the Nigerian economy in 2020. Our projection factored in movement in crude oil price, government capital spending and oil production volumes. Our worst-case scenario assumed an average crude oil price at US$44 per barrel in 2020; average crude oil production of 1.5 million barrels per day and capital spending of N1trillion in the 2020 budget. 

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The outcome showed that GDP will decline by 1.9%; Inflation will rise to 15%; Government revenue will decline by 25%; Exchange rate will reach N400/US$1 while the unemployment rate and underemployment rate will increase to 52% in 2020. With the COVID-19 outbreak and restrictions of movement and economic activities across certain sectors, the Nigerian economy will be severely affected in 2020. This means that our earlier envisioned worst-case scenario will become even worse especially as we adjust the assumptions of crude oil price and output. Several estimates have shown that GDP would contract significantly in 2020 (See Table 1).


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Major economic sectors will feel the impact of COVID-19 From a sectoral perspective, prior to COVID-19 outbreak, the economy showed signs of fragility as 10 out of the 46 activity sectors contracted in 2019 while about 16 of the 46 sectors recorded growth of less than 2% in the year.


Looking at the three broad sectors, Services remained the largest sector accounting for 52.6% of GDP. The sector was a major contributor to overall economic growth and housed three of the top five  fastest growing sectors in the year (See figure 2). Growth in Agriculture intensifies – the sector grew by 2.4% in 2019, an improvement from 2.1% in the previous year with growth led by aquaculture followed by crop production. Adequate rainfall, which improved vegetation and continued support of the government to farmers improved agricultural output in 2019.


Nigeria's huge market, improved oil sector performance, as well as government's interventions, were not enough to trigger significant growth of the industrial sector during the year. Industrial activities expanded by 2.3% with Coal Mining; Water Supply, Sewage, Waste Management and Remediation, and Crude Petroleum and Natural Gas playing major roles in the sector's growth narrative. Manufacturing grew marginally by 0.8% full year and continued to grapple with the perennial challenges of inconsistent policies, infrastructure deficit, poor electricity supply and lack of policy direction.


Considering the impact of COVID-19 on global crude oil price and demand, the oil sector in Nigeria will be the first and main culprit as it is expected to display negative growth in the year. Lower oil prices and staggering production are likely to persist with negative implications on government finances, other economic sectors and overall economic growth.


Drawing from previous experiences, contraction in the oil sector often drags overall economic growth. In several instances, the contraction in the oil sector had resulted in overall economic recession in the early 1980s, 1990s and in 2016. However, there are also a few cases where contraction in the oil sector did not lead to a recession and this was largely as a result of resilience of the non-oil sector and the adequacy of external reserves. For instance, the oil sector contracted between 2006 to 2008, but growth in the non-oil sector averaged 11% and sustained the economy. Similarly, external reserves stood at US$50 billion during the period.


Unfortunately, non-oil sector growth in 2018 and 2019 averaged 2% showing weak resilience while external reserves stood at $33bn in April 2020. These factors, coupled with the direct impact of lockdown and restrictions of economic activities in some sectors, will result in poor performance of the non-oil sector in 2020.


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Trade Balance declined in 2019 and was negative in the last quarter of the year 

In our Macroeconomic Outlook released in January, we had noted the declining trend of Nigeria's trade balance which stood at N2.8 trillion as at September 2019, from N5.4 trillion in the previous year. With the release of trade data for the fourth quarter of 2019, the overall trade deficit for full-year 2019 fell further to N2.2 trillion. This contraction was largely due to a decline in the value of crude oil exports and the negative impact of Nigeria's land border closure on non-oil exports which plunged by 43.9% in the fourth quarter of 2019. Also, in the quarter, Nigeria's trade balance slipped into a deficit of N579 billion ($1.6 billion) for the first time since the third quarter of 2016, implying that imports were higher than exports in the quarter.


With the outbreak of the coronavirus and lower crude oil demand, the export of crude is expected to fall further in 2020. As experienced in 2016, trade balance is expected to plunge into a deficit, with huge implications on government revenue, export earnings and external reserves.


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Foreign Investment inflow in 2019 outperformed 2018 but declined consistently from Q2

At US$24 billion, foreign investment inflow in 2019 was the highest Nigeria had recorded in over 10 years. As with previous years, growth in investment inflows was led by Foreign Portfolio Investments (FPI) and 'Other Investments', which accounted for 68.2% and 27.9% of total inflows respectively. Despite this significant increase in investment inflows relative to previous years, high level of uncertainty in the aftermath of the elections, delay in ministerial appointments and weak investors' sentiments resulted in declines in overall inflows from US$8.5 billion in Q1'2019 to US$5.8 billion in Q2'2019, US$5.4 billion in Q3'2019 and US$3.8 billion in Q4'2019. Foreign investment inflows into Nigeria would experience significant decline in 2020 given the fall in crude oil price, external reserves and uncertainty caused by COVID-19.


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