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Monthly Economic and Financial Market Outlook - Macro Economic Risks Wane

Proshare

Wednesday, June 14, 2017, 11:38 AM /FSDH

Executive Summary

·
    The Q1 2017 Gross Domestic Product (GDP) figures that the National Bureau of Statistics (NBS) released show that the Nigerian economy is on its way out of recession

·
      Nigeria’s GDP contracted by 0.52% in Q1 2017, the lowest level of contraction recorded inØ the last five quarters

·
     Manufacturing Purchasing Manager’s Index (PMI) in Nigeria expanded to 52.5% in MayØ 2017, compared with 51.1% in April 2017. The strengthening of the PMI indicates that the growth recovery in Nigerian economy is getting better

·
     We expect the inflation rate in Nigeria to drop to 16.13% in May 2017 from 17.24% in AprilØ 2017. However, the government decision on Premium Motor Spirit (PMS) price and electricity tariff still remain downside risks to the path of inflation in 2017

·
       We believe that the MPC may not change the current tight monetary policy stance exceptØ the inflation rate drops to the region around 11-12.5% and the exchange rate remains stable.

·
      The unemployment rate in Nigeria stood at 14.2% as at Q4 2016. As the economy continuesØ to gather momentum, we believe more factors of production will be employed and the unemployment rate should drop

·
      The peace in the Niger Delta region, the Organisation of the Petroleum Exporting CountriesØ (OPEC) and non-OPEC decision on crude oil output cut and strengthening of the global economic recovery are the main factors that would drive external reserves accretion in the short-term

·
     We expect to see a continued uptick in investors’ appetite for equity investment in JuneØ 2017.

·   With the improvements in the macroeconomic environment in Nigeria and investorsØ improved confidence in the economy, we expect that interest should drop in the short-term.

On the international scene: 
·         The OPEC released a global growth forecast of 3.3% in 2017, from 3.0% in 2016 in itsØ monthly report for May 2017 

·         The growth forecast is hinged on the uptick in global economic activity, which seems to beØ continuing with ongoing strong growth in the Euro-zone, solid output numbers in China and improvements in commodity exporting economies. 

Global Developments
In the countries we monitored, the prices of government bonds appreciated in more countries in May 2017 than they depreciated.  

The 12.71% June 2022 Kenya Government Bond recorded the highest month-on-month price increase of 1.50% to 100.09.  

The 17% April 2022 Egypt Government Bond recorded the highest month-on-month price decrease of 4.02% to 95.47. This was followed by the 3.52% February 2023 China Government Bond with a decrease of 1.40% to 99.35.  

The India, Russia, China, South Africa and Kenya Bonds closed the month at positive real yields. Other bonds we monitored closed the month at negative real yields.  

The India Government Bond offers the most attractive real yield amongst the selected bonds in May 2017.  

The United States (U.S) economy recorded a growth of 1.2% (quarter-on-quarter) in Q1 2017 from the second estimate released by the U.S Bureau of Economic Analysis (BEA).  

Consumer spending and non-residential fixed investment rose faster than anticipated but the drag from public spending and investment was lower than initially estimated.  

The U.S unemployment rate fell to 4.3% in April 2017 and below market expectations of 4.4%. It was the lowest unemployment rate since May 2001.  



 The Global GDP
The Organization of the Petroleum Exporting Countries (OPEC) released a global growth forecast of 3.3% in 2017, from 3.0% in 2016 in its monthly report for May 2017.  

The growth forecast is hinged on the uptick in global economic activity, which seems to be continuing with ongoing strong growth in the Euro-zone, solid output numbers in China and improvements in commodity exporting economies.  

The ongoing rebalancing in the oil market is also boosting global growth. OPEC added that the U.S. economy showed some weakness in Q1 2017 but it considers this as temporary, based on the latest labour market numbers and other short-term indicators.  

The Japanese economy’s output is still pointing to a higher level of growth in 2017 compared to last year.  

China has shown strong output numbers in recent months and the government is aiming to reach its target growth rate of 6.5%.  

India is also forecast to continue growing at a high rate and still has room to the upside, depending on near-term developments in domestic consumption, agricultural output and the success of its structural reforms.  

OPEC added that numerous uncertainties for global economic growth remain.  

These includes policy issues, which it says carries considerable weight, as well as the monetary policy decisions of major economies, which remain particularly important in the near-term.  

It added that, global debt levels remain high in some key economies, which will require further attention if interest rates continue to rise gradually and the US dollar keeps strengthening.  

It also said that sustained stability in commodity prices is viewed as necessary for ongoing improvement in global growth. 



Domestic Real GDP
The Q1 2017 Gross Domestic Product (GDP) figures that the National Bureau of Statistics (NBS) released show that the Nigerian economy is on its way out of recession. 

According to the NBS, the GDP contracted by 0.52%, the lowest level of contraction recorded in the last five quarters.

The contraction was mainly due to the decline recorded in Mining and Quarrying, and Trade sectors which countered the recovery in the Non-Oil sector of the economy.

The Nigerian economy entered into a recession in Q2 2016 following two consecutive quarters of GDP contraction. The economy contracted further in Q3 2016 and Q4 2016.  

Thus, the Nigerian economy contracted by 0.67%, 1.49%, 2.34% and, 1.73% in Q1, Q2, Q3 and Q4 2016 respectively (based on revised figures by the NBS).  

The following factors led the Nigerian economy into a recession: drop in crude oil price and production, foreign exchange shortages, non-payment of workers’ salaries in the public sector, low electricity generation and low investors’ confidence in Nigerian economy.  

The Oil GDP contracted by 11.64% in Q1 2017, compared with the contraction of 17.70% recorded in Q4 2016 and 4.81% recorded in Q1 2016. The Non-Oil sector of the economy grew by 0.72% in Q1 2017, compared with a contraction of 0.33% and 0.18% in Q4 and Q1 2016 respectively.  

The growth in the Non-Oil sector was driven by increased activities in Crop Production, Information and Communication, Manufacturing, Transportation and Other Services. The Non-Oil sector contributed 91.10% to the GDP in Q1 2017, while the Oil sector contributed 8.90%. The nominal GDP stood at N26.03trn in Q1 2017.  

The Services sector remains the largest sector of the Nigerian economy, accounting for 55.45% of the GDP as at Q1 2017. This is followed by Industries sector, which contributed 23.21% to the GDP as at Q1 2017. Agriculture accounted for 21.35% of the GDP as at Q1 2017.  

Water Supply, Sewage, Waste Management and Remediation sector recorded the highest growth rate of 12.63% in Q1 2017, followed by Arts, Entertainment and Recreation sector at 11.67%.  

However, Agriculture recorded the highest weighted growth rate of 0.72% in Q1 2017 followed by Information and Communication sector with a weighted growth rate of 0.34% as at Q1 2017.  

The real GDP at 2010 Constant Price stood at N15.86trn in Q1 2017, marginally lower than N15.94trn in Q1 2016. Our analysis of the recent developments in the Nigerian economy indicates that the economy may be out of the current recession between Q2 2017 and Q3 2017.  

Our review of the Purchasing Managers Index (PMI) shows that production activities are already picking up in Nigeria.  

The policy of the Central Bank of Nigeria (CBN) to increase the supply of foreign exchange is partly responsible for the expansion in the PMI.  

We also expect the CBN’s initiative to boost trade activities going forward, which is an important component of the country’s GDP, representing 17.78%.  

The improvement in the crude oil production and the expectation of average crude oil price about US$50/b should also lift the Oil GDP. 


 

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