Monday, May 23, 2016 6:41 PM / ARM Securities
Contraction in both oil and non-oil GDP Southwards plunges GDP into negative territory
Last Friday evening, the National Bureau of Statistics (NBS) reported that real GDP growth for Q1 16 slowed to -0.36% YoY – weakest since a contraction in Q1 2004. Moreover, relative to Q4 15, Q1 16 output growth is 250bps lower whilst relative to the corresponding period in 2015, the reading is 435bps lower.
Dissecting the components, oil GDP extended negative reading into the second consecutive quarter with YoY shrinkage of 1.89% (Q4 15: -8.28% YoY) whilst non-oil GDP growth slumped to a 48-quarter low of -0.21% YoY.
Figure 1: Quarterly trends in output growth
Increasing disruptions to oil pipelines weigh on oil GDP
Extending the trend in Q4 15, when oil production fell to 2.16mbpd (Q4 14: 2.19mbpd), NBS reports that oil production declined to 2.11mbpd in Q1 16 which, relative to 2.18mbpd in the corresponding period in 2015, mainly accounts for the contraction recorded in the sector.
Manufacturing resumed the negative trend bucked in Q4 15, contracting 8.1% in Q1 16 whilst Agriculture GDP slowed to 3.1% YoY. In a similar vein, Services GDP extended the downward trajectory observed over 2015 (Q1 16: 0.2% YoY) despite a 5.0% YoY growth in Telecommunications, even as Financial Institutions contracted (-13.2% YoY) for the first time since 2011.
Having already revised our 2016 estimates lower before any numbers for the year were even released the weakness in Q1 16 GDP does not come as a complete surprise. Notwithstanding, the delay in budget passage, which was a critical factor in the earlier downward revision, persisted for much of Q2 16 indicating an extension of its dour implications. Due to this and other factors, we cut our 2016 GDP forecast by two-thirds to 1% YoY (+/-50bps).
Figure 2: Oil prices and production
Manufacturing resumes negative trend as Services continues to slope downward
Manufacturing resumed the negative trend bucked in Q4 15, contracting 8.1% in Q1 16, as Food, Beverage and Tobacco (FBT) and Textiles, Apparel and Footwear
(TAF) declined 11% and 3% respectively. Elsewhere, Agriculture GDP slowed to 3.1% YoY—in line with FEWSNET’s reports of declines in sorghum (-6% YoY), maize (-3% YoY) and millet (-3% YoY) harvests as late rainfall across many areas of the country delayed crop growth. Notwithstanding, the weakness in the numbers was pervasive as the negative trend of Building and Construction worsened (Q1 16: -5.4% YoY)), whilst Services GDP extended the downward trajectory observed over 2015 (Q1 16: 0.2% YoY) despite a 5.0% YoY growth in Telecommunications, even as Financial Institutions contracted (-13.2% YoY) for the first time since 2011.
Figure 3: Trends in components of Non-oil GDP
Increasing attacks on oil installations temper growth expectations despite budget assent
On the non-oil front, whilst we expect the recent passage of the 2016 budget into law to kick-start stimulatory fiscal spending with ripple effects across sectors, we believe the earliest the impact of the budget could be felt would be in Q4 16. We thus expect a reversal of the recessionary trend in many sectors towards the end of the year on account of increased capital expenditure. Moreover, we expect the pass-through effect of spending on capital projects on consumer spending to cascade into growth in both manufacturing and services. Furthermore, FEWSNET’s reports of dry season harvests in April, in addition to early green harvest of yams and maize in May/June, also suggest growth in agriculture GDP.
Furthermore, we not only expect the latest reading to drive impetus for reduction in MPR, in addition to other easing measures, but also expect administrative measures aimed at easing illiquidity across FX markets from the CBN.
For oil GDP, whilst crude prices have been on a rebound to four-month-highs of late, the fact that YTD average remains 35% lower than corresponding period in 2015 does little to improve bearish outlook over 2016, and this should continue to discourage exploratory activity. This outlook is further worsened by incessant attacks on strategic pipelines such as Trans Forcados (TFP) which have reduced daily production by about 500kbpd. Moreover, the non-passage of the two oil reform bills submitted in 2015 into law remains a concern for the sector. In sum, we remain bearish about the oil sector over 2016.
Having already revised our 2016 estimates lower before any numbers for the year were even released the weakness in Q1 16 GDP does not come as a complete surprise.
Notwithstanding, the delay in budget passage, which was a critical factor in the earlier downward revision, persisted for much of Q2 16 indicating an extension of its dour implications. Furthermore, the challenges with Agriculture, which may not even respond to fiscal stimulus at all, appears to not yet be fully captured in Q1 16 numbers with the potential for the same conditions that impacted dry season harvest to yet impact the main harvest in Q3/Q4, even if to a lesser degree. To our mind, that significantly constrains the scope of expected recovery in non-oil GDP even as the lag in ramping up production after pipeline and similar disruptions portend the same for oil GDP. Accordingly, we cut our 2016 GDP forecast by two-thirds to 1% YoY (+/-50bps), with Agriculture and planned fiscal spending (as it impacts Manufacturing/Construction) central to the probability of even that target being achieved. Of the estimated 190bps cutback in the growth figure, the oil sector accounts for 130bps while consumer spending accounts for 60bps, though we may have been somewhat conservative on the latter front.