Nigeria's Recession Bust: GDP Does A Bungee Jump, Reverses To -3.62%

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Tuesday, November 24, 2020, 12:45 PM / by Proshare Research/ Header Image Credit: NBS


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Not many people fancy a bungee jump and definitely not policymakers troubled by economic headwinds, but with Nigeria's recent GDP figures for Q3 2020 reversing from -6.10% in Q2 2020 to -3.62%, the mild drop in the aggregate value of goods produced in the country may have a pleasant side after all.

 

As the COVID-19 pandemic continues to hit hard with uncertainty around international crude oil prices, Nigeria's domestic economy has slipped into its second recession in five years. The first recession between 2016 and 2017 was the consequence of a global financial meltdown but the recent recession has been dragged up by a double whammy of a global virus pandemic and a sharp drop in international oil prices. The recent tumble in gross domestic output has made growth rates of between 6.21% and 5.94%  that characterized 2014 look like fairy tales from another age (see Chart 1 below).

 

Chart 1: Nigeria's GDP Growth (%)

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Source: NBS, Proshare Research

 

The recent decline in the rate of contraction could be tied to the easing of restrictions on businesses, the reopening of international and domestic travels, and a resumption of wholesale and retail trading activities. The shift in the economic needle in the last three months reflects an expected rebound in businesses but still carries the threat of a pandemic-induced reversal accompanied by a potential fall in oil demand and prices (see table 1 below).

 

 

Table 1: Understanding the Figures; Beyond the Numbers


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The top five sectors with the highest growth in Q3 2020 were Information & Communication +14.56%, Water supply +7.10%, Public administration +3.58%, Financial & Insurance +3.21%, and Construction +2.84% (see Chart 2 below).


Chart 2: Sectors with the Largest Growth in Q3 2020 (%)

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Source: NBS, Proshare Research

 

The top five sectors with the highest contraction in Q3 2020 were transportation & storage -42.98%, Accommodation & Food services -22.61%, Education -20.74%, Real Estate -13.40%, and Mining & Quarrying -13.22% (see Chart 3 below).

 

Chart 3: Sectors with the Largest Contraction in Q3 2020 (%)

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Source: NBS, Proshare Research

 

In Q3 2020, some sectors recorded improvements in their growth while some other sectors recorded worsening contraction when compared with the previous quarter i.e., the contraction in the Mining & Quarrying sector worsened from -6.6% in Q2 2020 to -13.22% in Q3 2020. While the level of contraction in the manufacturing sector declined from -8.78% in Q2 2020 to -1.51% in Q3 2020. On the other hand, there was a rebound in the construction sector as it recorded a growth of +2.84% in Q3 2020 from a contraction of -31.77% in Q2 2020 (see Table 2 below).

 

Table 2: Sectors Real GDP Growth (%)

Sectors

Q2 2020

Q3 2020

Agriculture

1.58

1.39

Mining & Quarrying

-6.6

-13.22

Manufacturing

-8.78

-1.51

Electricity, gas stream and air condition supply

-3

-3.66

Water Supply

5.71

7.1

Construction

-31.77

2.84

Trade

-16.59

-12.12

Accommodation

-40.19

-22.61

Transportation

-49.23

-42.98

Information & Communication

15.09

14.56

Arts, Entertainment & Recreation

-8.93

-4.67

Financial and Insurance

18.49

3.21

Real Estate

-21.99

-13.4

Professional

-15.41

-10.31

Administrative

-2.39

-1.21

Public Admin

2.02

3.58

Education

-24.12

-20.74

Human Health

1.89

2.82

Other Services

-15.07

-7.53

Source: NBS, Proshare Research


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Avoiding Deja vu

In Q3 2020 Nigeria recorded its second recession in five years, and the trajectory follows a pattern similar to the last recession which saw GDP slump in four quarters in 2016. Accompanying the contraction was a rise in inflation rate as GDP contracted by -1.49% in Q2 2016 while the inflation rose by +15.26% (see Chart 4).

 

Chart 4: Understanding Nigeria's Recessionary Period

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Source: NBS, Proshare Research

 

The trend appears the same for the current recession with GDP contracting by -3.62% in Q3 2020 while headline inflation was +13.25%. The contraction in Nigeria's GDP coinciding with rising inflation reflects the structural defects in the Nigerian economy.

 

Analysts note that Nigeria's recession in 2016 was triggered by the fall in international oil price while the the recent recession was caused by something different. The 2020 recession has been attributed to the coronavirus which was worsened by a shock decline in international crude oil prices and a surge in crude oil supply as Russia and Saudi Arabia opted for a beggar-thy-neighbour trade strategy in Q1 2020.

 

When is a Recovery Expected?

Nigeria's path to recovery may not be far off if the coronavirus pandemic is contained and a vaccine distributed in the early parts of 2021. A “no-new-lockdown” scenario would see real GDP grow by roughly 1% in Q1 2021 based on in-house macroeconomic models, GDP in Q1 2021 could grow between +0.98% and +1.3% depending on the size of fiscal policy stimulus in the first quarter. The recent -3.46% indicates a reversal in fortunes from the previous Q2 growth rate of -6.10%.   Following the recommendations by the Lagos Chamber of Commerce and Industry (LCCI), sustained recovery would require a realignment of national priorities with a renewed focus on infrastructure and industrialization as well as increased support for Small and Medium Enterprises (SMEs) (see Table 3 below).

 

Table 3: Understanding the Future; Braving A Virus, Beating A Bear

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Recent news of a 95% effective vaccine against the coronavirus creates optimism for  a rebound of the international oil market with Brent oil price already climbing to US$46.06 per barrel as at November 23 2020 from US$24.93 per barrel at the end of March 2020. 

 

The distribution of vaccines would help spur global economic growth and spring an oil price recovery. Nigeria's economic growth in 2021 rests precariously on recovery in oil price and hopes of an early distribution of COVID-19 vaccine.

 

Between A Rock and a Hard Place

The Cemtral Bank of Nigeria's monetary policy committee (MPC) would be holding its last meeting for the year in the week and the CBN may face a difficult task moderating the effects of slow economic growth and rising inflation (stagflation) on citizens. A few leading global economies saw low inflation rates at the beginning of Q4 2020 with the UK posting an inflation rate of +0.7%, the USA +1.2%, and South Korea +0.5%, thereby enabling these economies to cut their domestic interest rates to support GDP growth, this luxury does not exist for Nigeria with a recent inflation rate of +14.23%. Against this background analysts have speculated that the CBN is likely to keep monetary policy rates fixed as it waits to see the direction of economic growth going into the new year.  



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