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Sustaining Economic Growth: Policy Options

Proshare

Friday, September 15, 2017 / 10:28AM /FSDH Research

Executive Summary

Domestic Scene

After five consecutive quarters of contraction in Real Domestic Product (GDP), the Nigerian economy exited the first recession in over two decades


The Q2, 2017 figures that the National Bureau of Statistics (NBS) released on Tuesday, September 05, 2017 shows that the GDP recorded a growth rate of 0.55%


A review of the latest Purchasing Managers’ Index (PMI) report that the Central Bank of Nigeria (CBN) published for the month of August 2017 shows that the Nigerian economy maintains its economic growth recovery path witnessed since March 2017


The Composite Non-Manufacturing Index (CNMI) also expanded to 53.6 points in August 2017 from 54.1 points in July 2017


The total capital imported into the Nigerian economy increased to US$1.79bn in Q2, 2017 from US$908mn in Q1, 2017 and US$1.04bn in Q2, 2016


We expect the inflation rate in Nigeria to drop to 15.99% in August 2017 from 16.05% in July 2017


The favourable price of Bonny Light and oil production should help to boost the external reserves in the short-to-medium term.


Yields on fixed income securities may trend marginally lower in September 2017 because of the expected decrease in the inflation rate in August 2017 and the liquidity and stability in the foreign exchange market


We expect to see some profit taking activities in the equity market in September 2017, especially on stocks that have recorded strong appreciation in their share price.


International Scene

The Organization of the Petroleum Exporting Countries (OPEC) released a global growth forecast of 3.4% for 2017 and 2018 in its monthly report for August 2017.


OPEC stated that with the ongoing global growth momentum and its expected continuation in HY2 2017, there is still some room to the upside for global growth levels


Global Developments

In the countries we monitored, the prices of government bonds recorded more increases than decreases in August 2017, compared with July 2017. The 17% April 2022 Egypt Government Bond recorded the highest month-on-month price increase of 5.12% to 100.87. This was followed by the 1.75% May 2023 United States (U.S) Government Treasury Note with an increase of 0.87% to 99.65. The 16.39% January 2022 Nigeria Government Bond recorded the highest month-on-month price decrease of 0.91% to 99.70.


This was followed by the 3.52% February 2023 China Government Bond, with a price decrease of 0.42% to 99.60. The Kenya, India, Russia, South Africa, China, Nigeria, and U.S Bonds closed the month at positive real yields. Other bonds we monitored closed the month at negative real yields. The Kenya Government Bond offered the most attractive real yield amongst the selected bonds in August 2017.


The US economy grew by 3% in Q2 2017, from the second estimate released by the U.S Bureau of Economic Analysis (BEA). It is the strongest growth rate since Q3 2015. Increases in consumer spending and non-residential fixed investment were larger than previously estimated, offsetting a drag from government expenditure and investment.


The US unemployment rate however rose to 4.4% in August 2017, from 4.3% in the previous month and above market consensus of 4.3%. Similarly, the inflation rate in the U.S increased to 1.7% year-on-year (Y-O-Y) in July 2017, from 1.6% in June 2017. Prices rose at a faster pace for energy, food, medical care commodities and transportation services.




The Global GDP

The Organization of the Petroleum Exporting Countries (OPEC) released a global growth forecast of 3.4% for 2017 and 2018 in its monthly report for August 2017. The forecasts are based on the latest global economic indicators, which confirm its earlier view on the continuation of the improvement in the global economy.


The organization asserted that economic growth momentum in the Organization for Economic Cooperation and Development (OECD), United States (US), the Euro-zone and improving economic activity in Japan are all supportive for the global economy. In the non-OECD economies, China is also showing better-than-expected growth, India is forecast to keep a high growth level, and Brazil and Russia are recovering from their two-year recession. Nigeria has also emerged from a recession, with an economic growth rate of 0.55% recorded in Q2 2017.


OPEC stated that with the ongoing global growth momentum and its expected continuation in HY2 2017, there is still some room to the upside for global growth levels. However, the organization added that challenges remain; mainly related to global political developments and upcoming monetary policy decisions, particularly for the U.S and the Euro-zone.


The cartel opines that the high valuations in global equity and bond markets, in combination with low volatility also pose downside risks. This is because of the willingness of central banks to reduce monetary stimulus measures. It also added that debt levels remain high in some key economies, an issue that will probably require further attention if interest rates continue to rise gradually, particularly in the US. Finally, the report highlighted that the sustained stability in commodity prices, particularly oil prices, is viewed as necessary for ongoing improvements in global economic growth.




Nigeria Exits Recession

After five consecutive quarters of contraction in the Real Gross Domestic Product (GDP), the Nigerian economy exited the first recession in over two decades. The Q2, 2017 figures that the National Bureau of Statistics (NBS) released on Tuesday, September 05, 2017 shows that the GDP recorded a growth rate of 0.55%. The growth in the GDP was mainly due to the growth recorded in Agriculture, Financial and Insurance, Electricity, Gas, Steam and Air Conditioning Supply, and Mining and Quarrying sectors of the Nigerian economy.


The Oil sector, which grew by 1.64% in Q2, 2017, recorded the first growth since Q4, 2015. The growth in the Non-Oil sector at 0.45% in Q2 2017 decelerated from a growth rate of 0.72% recorded in Q1, 2017. The Nigerian economy entered into a recession in Q2 2016 following two consecutive quarters of GDP contraction. The recovery in crude oil production and price and the introduction of the Investors’ and Exporters’ foreign exchange window, which increased the supply of foreign exchange to end users, helped to pull the economy out of recession.
 



In the crop producing regions in the country particularly in the Middle-Belt and the North, and the poor infrastructure in transportation and storage facilities led to the deceleration in the growth rate of the Agriculture sector.  

The Real Estate sector, which contributed 7.22% to the GDP, also contracted by 3.53% in Q2, 2017 albeit at a much lower rate when compared with the contraction of 5.27% recorded in Q2, 2016. The Manufacturing sector, which contributed 9.38% to the GDP, recorded a weak growth of 0.64% from a growth of 1.36% recorded in Q1, 2017.  

This was however a recovery compared with the contraction of 3.36% recorded in Q2, 2016. There is the need for the Federal Government of Nigeria (FGN) to find a lasting solution to the attacks on farm lands in Nigeria in order to increase production. There should also be incentives in the form of tax reliefs and favourable land acquisition laws for the agro-allied industry in order to boost agriculture. Additionally, there should be more focus on agricultural training and research institutes in the country to increase farm yields. 

Concrete steps should be taken to involve the private sector in the provision of transport and storage facilities to reduce waste and give farm produce easy access to markets. Government may also consider tax holidays and reduction to companies that make use of local agricultural raw materials in their production process. This will increase both human and material employment of local resources in Nigeria.

It is also important to allow for an adjustment in the communication tariff to boost investments and improve facility maintenance.  

In order to support the growth of real estate, government at all levels should partner with real estate developers, both local and foreign, to support the development of mass housing projects for low and middle income earners. These housing units should be made available through long-term financing structures, which should be guaranteed by the government.  

This would provide both direct and indirect employment opportunities to Nigerians in real estate, construction and manufacturing sectors. In addition, it will help to protect the revenue of the government against the volatility in the oil industry and ultimately guarantee sustainable economic growth and development.





Purchasing Manager Index (PMI)
A review of the latest Purchasing Managers’ Index (PMI) report that the Central Bank of Nigeria (CBN) published for the month of August 2017 shows that the Nigerian economy maintains its economic growth recovery path witnessed since March 2017. 

The PMI continued on its upward momentum in August 2017. The manufacturing and nonmanufacturing activities increased in the month of August 2017, compared with the level of activities recorded in the month of July 2017.  

The PMI report shows that the Composite Manufacturing Index (CMI) expanded for the fifth consecutive month in the year 2017. For the CMI, the Production Level, New Orders and Employment Level grew at a slower rate; while Supplier Delivery Time and Inventories grew at a faster rate in August 2017.  

The CMI stood at 53.6 points in August 2017, from 54.1 points in July 2017. The Composite Nonmanufacturing Index (CNMI) also expanded for the fourth consecutive month to 54.1 points in August 2017 from 54.4 points in July 2017.  

A PMI below the 50 points level suggests a decline in business activity while a PMI higher than the 50 points level suggests an expansion. When the PMI is at the 50 point level, it means that the degree of business activity in the economy is unchanged. 

We believe that manufacturing and non-manufacturing activities in the country have increased in the last few months largely because of the CBN’s strategy to increase the supply of foreign exchange. This strategy has improved businesses’ and consumers’ confidence in the economy. Most of the components of the PMI recorded increased levels of growth in August 2017 compared with July 2017. On the average, the Manufacturing Sub-Sector Indices recorded growth in August 2017 over the level recorded in July 2017. 







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