Thursday, September 01, 2016 11:02am /Vetiva Research
· Q2 real GDP declines 2.09% compared to our 2.9% estimate
· Oil sector in the middle of deep slump
· Services sector growth turns negative
· 2016 real GDP growth seen at -1.3%
Recession confirmed, tough outlook ahead
Nigeria’s recession received the official stamp with real GDP down 2.06% y/y in Q2’16. Whilst a negative growth was expected, the size of the decline is of greater importance with Bloomberg Consensus and Vetiva estimates varying as wide as -1.6% and -2.9% respectively.
We witnessed three key policy events in the quarter: partial deregulation of petroleum downstream and full assent of 2016 budget in May, and liberalization of the foreign exchange (FX) market in June.
However, accrued benefits from these were likely to have been minimal in the period with the economy instead greatly injured by prior policy inertia, surging prices and increased international isolation.
Following the 0.36% y/y decline in Q1’16 that indicated the bleak 2016 outlook, the poor performance of the economy in this quarter was underscored by a dismal 0.82% q/q rise in real GDP.
This was largely driven by the oil sector which contracted 19.11% against the preceding quarter on the back of lower oil production, with average oil output down 360,000 bpd to 1.69m bpd as a result of increased militant activity in the Niger Delta region. Year-on-year, the oil sector contracted 17.48% (Q1’2016: -1.96%).
One salient effect of the decline in the oil sector is its shrinking contribution to real GDP even as it remains highly significant for export earnings. The sector now contributes 8.26%, half of its contribution in 2011 (17.5%).
The malaise spread to the non-oil sector as it recorded a second successive quarter of y/y declines, notching negative growth of 0.38% vs 0.18% in Q1’16. In particular, improved growth in Agriculture was countered by the Services sector with growth there entering negative territory.
Agriculture rebound, Services slump
One small positive is the increase in Agriculture sector growth to 4.53% y/y. The disappointing 3.09% y/y growth recorded in the first quarter of the year was a worrisome sign for a flagship sector of the current administration’s economic policy.
We highlight the positive influence of increased crop production (up 4.72% y/y), most likely driven by higher price incentive (due to increased local patronage) and better than expected rainfall in the quarter. Going into harvest season, we expect sustained growth in the sector as it continues to benefit from Government initiatives and the rollout of 2016-2020 Agriculture Promotion Policy.
Manufacturing sector contracted again year-on-year (Q2’16: -3.36% vs Q1’16: -7%), led by a 5.53% decline in the Food, Beverage and Tobacco component, reflecting depressed consumer demand during the period.
Growth against the previous quarter was -0.2%, underlining the claims of the Manufacturers’ Association of Nigeria (MAN) that higher costs, filtering through from a greater use of alternative energy and parallel market FX sourcing, as well as higher lending rates, are stifling productive activity and causing business closures.
The Services sector, still the largest sector in the economy, contracted 1.66% y/y after treading water in the first quarter of the year. Trade, Air Transport, and Finance and Insurance recorded y/y and q/q declines as the increased cost of fuel (nationwide diesel prices peaked at ₦183 in June), oil industry weakness and frail business confidence dented activity.
Underlying drivers to keep growth negative
Q2 GDP figures may offer an insight into the future composition of GDP along the 4 key sectors (Agriculture, Oil & Mining, Manufacturing, Services). We suggest that the combination of a diversification agenda and a disrupted global oil market will keep Oil sector contribution to GDP low whilst stronger Agriculture sector growth will see it assume a greater share of GDP, reaching 25% on a consistent basis by 2017.
Meanwhile, the Manufacturing and Services sectors are highly vulnerable to Nigeria’s spiraling inflation, whilst growths in these sectors remain key for sustainable job creation. We expect recession to last for the rest of the year with Q3 and Q4 GDP growth to register at -1.72% and -1.09% respectively to bring 2016 annual growth to -1.32%.
This is because the underlying drivers of the slump – challenges in oil production and currency weakness – are unlikely to ease until the turn of the year. Furthermore, with a tighter monetary environment in H2 and funding delays for Government capital expenditure, we do not anticipate any significant positive shocks this year. Driven by low base effect and a brighter currency outlook, we expect a minor growth rebound in 2017 to 1.23%.
9. Telecoms Sector Contributes 8.88% to GDP in Q4 2015