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Domestic Economy - Lingering Negative Output Gaps

Proshare

Sunday, July 08, 2018 1:30PM / Proshare Research 

Table 1: Macro Economic Indicators

Indicator

PRESENT

PREVIOUS

Inflation

11.61

12.48

GDP

1.95

2

Oil production

1.95 million barrel

2 million barrels

Oil price

67.45$/ barrel

62.43$/barrel

Exchange rate  (IFM)

N362.86/$

N362.25/$

Exchange rate (BDC)

N412.23/$

N428.33/$

T-bill rate

10.14

11

MPR

14

14

MLR

31.29

31.56

PMI

57

56.5

Foreign reserve

47.795

47.798

Net foreign asset

18.29

15.906

M2

25.169

24.52

Income velocity M2

4.57

4.69

M1

11.22

10.67

Income velocity M1

10.24

10.77

Unemployment

18.80%

16.20%

underemployment

21%

19.70%

Debt

22.07

21.725

debt to GDP

0.19

0.18

Debt Servicing

            N643 billion

N429.7 billion

Source: CBN, NBS

 

Key Take aways: 

·     The economy grew by 1.95% at the end of Q1 2018, reflecting a simmering down in momentum.

·    The rise in oil price from $62.43 to $67.45 per barrel provided leg wind for both output in nominal and boosted inflow. Thereby, lifting external trade to GDP from 19.3% to 25%

·   Foreign reserve caved inwards in the month of June as the reserve partly absorb shock from outflow.

·    Inflation dipped from 12.48% in April to 11.61% in May. In reaction to the dip in inflation the Treasury bill rate fell from 11% in April to 10.14% in June 2018.

·    Money supply (broad money) rose tepidly from N21.75 trillion to 22.07 trillion, however income velocity of M2 for the period stood at 4.57

·     Narrow money rose from N11.22 trillion to N10.67 trillion, at the same  time income velocity of M1 for the period under consideration stood at N10.24trillion

·     Net foreign asset have continued to surge as it rose from N15.906 trillion to N18.29 trillion
 

Outlook for GDP And Inflation 

Output: Daggling towards an under heated cycle 

GDP Growth at the end of the first quarter of 2017 dipped from 2% to 1.95%.  The claw back witnessed in sectors such as construction and agriculture contributed to the dip in growth.  Although with the passage of the budget, government expenditure is expected to stimulate the economy, the lag effects attributed to the budget will still play out for some time.  Moreover with the elections taking steam, political uncertainty will slow down capital formation. 

Thus, we forecast dimmer growth momentum with relatively stable oil price, as we largely see the economy wobbling through the larger part of the year. On this note, we expect a 1.82%, 1.86% and 1.88% growth for Q2, Q3 and Q4 2018, respectively.

 

Fig 1:   GDP Growth

Proshare Nigeria Pvt. Ltd.

Sources: NBS, Proshare Research
 

Evidently, the recovery have been far from a V recovery, as the desperately needed V recovery remains largely elusive in 2018; far off from an escape velocity and still tagging behind population growth.
 

Price Movement: Towards the Sweet spot   

Fig 2: Inflation 

Proshare Nigeria Pvt. Ltd.

Sources: NBS, Proshare Research
 

Based on our adjusted ARIMA model, we are of the opinion that inflation will maintain a downward trajectory moving forward. Therefore inflation will dip further southwards from 11.65% in May to 10.7% in June; at the same time pinpointing to a negative relationship between forecasted error and oil price at -0.492. 

Thus, we see relatively limited room for forecasted error in the face of an oil price rally, underpinning the claw back in cost push inflation. Obviously, we expect price movement to touch down at a single figure by the month of July, specifically 9.8%. Thus, dialing toward the Central bank’s sweet spot for inflation.   

We are of the opinion that with relatively more stable oil price combined with earlier one time off friction from first round effect fizzling off, inflation will sustain a downward trajectory till September 2018. Although an upswing in money supply is expected due to the passage of the budget and the election season, money supply remains muted in our forecast for now.    

 

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