| Nigeria Economy |    1060 VIEWS  |
| Nigeria Economy | |
| 1060 VIEWS | |
 | |
| PROSHARE | |
| PROSHARE | |
Monday, July 13, 2020 / 05:57 PM / By FDC Ltd
/ Header Image Credit: FDC Ltd
Our market survey points towards a 0.15% increase in
the headline inflation to 12.55% in June from 12.40% in May. This will be the
10th consecutive monthly increase and the highest rate in over 2 years. The
main inflation driver is the supply disruptions caused by the planting season
and the partial lockdown of the economy. Its impact was exacerbated by the
exchange rate adjustments and higher logistics cost. The currency has been
devalued twice in the last four months. The resulting impact will be a spike in
imported goods especially for an import dependent economy like Nigeria with a
marginal propensity to import of 0.63. Therefore, imported inflation currently
at 16.27%, is expected to increase.
The good news is that month-on-month inflation, which
is more of a measure of current market realities, is projected to decline for
the first time in three months to 1.15% (annualized at 14.61%). The gradual
easing of the lockdown especially the inter-state movement has provided some
support for the commodity supply chain, thus increasing output levels. This is
reflected in the FBN PMI which is now in positive territory (53.9 points) after
three months of contraction.
Commodities Price Trend
in June
We noticed a mixed movement in commodity prices in
June. While the price of tomatoes, pepper, yam, onions and palm oil increased
due to seasonal factors, the price of locally produced sugar and yellow garri
declined.
In certain urban markets, we noticed a switching and
substitution of tastes towards cheaper priced commodities.
We expect the prices of most of these items to decline
in Q3, which is the commencement of the harvest season. The sharp decline in
sugar prices was partly supported by the relaxation of the interstate movement
restrictions.
On the global front, global commodity prices increased
in June for the first time this year. The food price index increased by 2.4% to
93.2 points, driven by a pickup in the prices of vegetable oils, sugar and
dairy. Cereals and meat prices trended downwards due to market uncertainties
triggered by the health crisis.
Aggregate demand will
remain subdued
In the last four months, consumers' disposable income
has been adversely affected by the covid-induced economic paralysis. This is
expected to continue in Q3 as companies still struggle to stay afloat in this
period of economic downturn. Hence we expect aggregate demand to remain
subdued. This will help to taper inflationary pressures in the coming months.
Peer comparison - mixed
movement in Inflation - 4 Reds, 3 Greens
The inflation trend across Sub-Saharan African (SSA)
countries remain mixed. Four of the SSA countries under our review have
released their inflation numbers for June. While Kenya and Zambia reported
lower inflation, Uganda and Angola recorded an increase. This was largely due
to the movement in food prices impacted by the shutdown in various cities.
Most of the SSA countries continued to adopt an
accommodative monetary policy stance to mitigate the impact of the Covid-19
effect on their economy.
Concluding Thoughts
Monetary policy decisions are based on inflation
expectations rather than the historical trend. Headline inflation is projected
to decline in Q3 due to improved output from the harvest season and pickup in
activity level. The anticipated decline in inflation will provide some relief
for the MPC committee at their meeting this month. However, currency
devaluation remains a major threat to these inflation expectations.
Related News
Signup with Facebook
Signup with Twitter
