Nigeria’s weak Q2 GDP raises concerns for economy

About a week before the National Bureau of Statistics (NBS) released second quarter 2018 Gross Domestic Product (GDP) data, the Statistician-General of the bureau, Dr. Yemi Kale, had hinted that the numbers would fall short of expectations.

He reportedly stated that apart from the political and economic uncertainty over the general elections in 2019, what is contributing mainly to slow down in the economy is impact of the herders/ farmers’ clashes on the agriculture sector, which is the biggest contributor to the GDP. The NBS boss was quoted as saying: “I am not going to give the final figure because the work is not even completed but from the numbers I am seeing, it is looking quite flat.

Surprisingly, but I expected the numbers should be much better, but it is looking very similar to the first quarter. I think the economy is still struggling out of recession and that is what the numbers are showing.”

In fact, the data released by the Statistics Office on August 27 showed that Q2 GDP growth declined to 1.50 per cent from 1.95 per cent reported for the first quarter of this year. The drop in Q2 GDP growth rate clearly came as a surprise to financial analysts, as they scrambled to offer reasons as well as assess the implications of the slower than expected growth.

Analysts’ reactions

For instance, commenting on the GDP data, analysts at FSDH Research stated: “The real GDP growth rate of 1.50 per cent recorded in Q2 2018 was below the expectations of most analysts. The GDP numbers reflect the impact of the rising uncertainties in the country. The low growth and contraction across many sectors of the Nigerian economy also underscore the need for an urgent set of policies and engagements to rescue the economy.”

According to the experts: “Although the fragile growth was driven by the non-oil sector, the fact that dominant sectors of the economy either recorded low growth or contracted in Q2 2018 indicates that urgent actions are required. Agriculture, which is the largest sector of the Nigerian economy at 22.86 per cent, recorded a marginal growth of only 1.19 per cent. “FSDH Research notes that the slow growth in the agriculture sector, if not checked, may lead to food shortage in the country and consequently escalating food prices and rising inflation rate,” the firm added.

Besides, it said that trade-the second largest sector of the Nigerian economy- contracted by 2.14per cent in Q2 2018, pointing out: “The weak purchasing power in the country (occasioned by nonpayment of salaries, high unemployment rate and high consumer prices) is responsible for the contraction in the Trade sector. “The current low GDP growth rate is not strong enough to stimulate credit creation. It has also increased the risk of doing business in Nigeria.

Therefore, urgent measures are required so that low GDP growth rate does not become a new norm in Nigeria.” Corroborating FSDH Research’s comments, Renaissance Capital’s (RenCap) Sub-Saharan Africa (SSA) Economist, Yvonne Mhango, stated: “The slowdown in Nigeria’s YoY growth to 1.5 per cent in 2Q18, from 2.0 per cent in 1Q18, was partly due to a 4.0 per cent contraction in the oil sector, which masked stronger non-oil sector growth.

“It is notable that the biggest non-oil sectors – crop production, wholesale and retail trade and manufacturing – underperformed. We believe this is in part due to a weak consumer. Due to trade’s protracted slump, the sharper-than-expected slowdown in crop production, the peaking of oil production, and the weak consumer’s cap on manufacturing, we lower our 2018 growth forecast to 2.0 per cent, from 2.9 per cent previously. We also lower our 2019 forecast to 2.5 per cent, vs 3.0 per cent.”

The RenCap Economist also pointed out that wholesale and retail trade, the second-biggest sector, saw its contraction deepen to 2.1per cent YoY in 2Q18, vs -1.6per cent YoY a year. She adding: “We believe this reflects a consumer that is still weak.” Furthermore, the financial expert noted that while improved foreign exchange liquidity helped bring manufacturing out of recession in Q2 2018, “the weak consumer has capped its growth. This is affirmed by manufacturers’ taking out FX loans for working capital needs rather than capex.”

She predicted: “Other than a lift from an expansionary budget, we see limited upside to 2H18 growth.” Indeed, also commenting on the Q2 GDP numbers, experts at CardinalStone Research forecast a further drop in economic output in H2’18 due to poor growth in the agriculture sector.

They noted that a major reason for the decline in Q2 2018 GDP was the sharp slowdown in agriculture sector growth, predicting that they expect this factor to also negatively impact GDP growth in the second half of 2018.

According to the experts: “The slowest agriculture sector growth in 14 years (1.50% YoY), weak crude petroleum and natural gas production dampened GDP growth in Q2’18. Although we expect a bounce back in the oil sector and healthy growth in services to spur growth in the final two quarters, we see poor agricultural growth weighing down GDP growth in H2’18. We forecast a further slowdown in growth to 1.4% YoY in Q3’18 and 1.75% YoY FY’18.”

Similarly, in an analysis of the GDP data posted on its website, Nairametrics stated: “The decrease in the GDP growth rate in the second quarter of 2018 (which is a second consecutive decline) is a negative development for the Nigerian economy, considering the fact that it recently exited recession in the same period last year.”

“The slump in the GDP growth rate in the second quarter of 2018 may not be totally unexpected, as the following may be adjudged as possible reasons for the fall in GDP growth rate: delay in the passage of the budget for a period of six months, during which the economy was almost at standstill and some companies halted their business decisions awaiting budget passage; decline in the importation of capital into the country by 12.53per cent in the period under review to $5.51 billion from $6.30 billion in the previous quarter of Q1 2018 and increased political tensions in Q2 2018 caused some investors to pull out their investment out of the economy.”

Impact

Significantly, the fall in Q2 GDP now appears to have made analysts confident that the Central Bank of Nigeria (CBN) will leave interest rates unchanged when its Monetary Policy Committee (MPC) meets next Monday and Tuesday.

Specifically, RenCap said: “The Nigerian economy under-delivered; growth came in weaker than we expected and the Monetary Policy Committee (MPC) chatter has swung from rate cuts to hikes. We no longer expect a rate cut in 2018, owing to emerging inflationary pressures, in part due to an expansionary FY18 budget. We now expect the policy rate to be held at 14.0% until YE19.”

In the same vein, even though he predicts that the MPC will leave rates unchanged, the Chief Executive Officer, Financial Derivatives Company Limited (FDC), Mr. Bismarck Rewane, noted that the decline in Q2 GDP: “Supports the argument for a rate cut.”

In fact, the FDC CEO has been one of the most vocal advocates for a cut in interest rates, consistently making the case that unless the benchmark interest rate, the Monetary Policy Rate (MPR), which had been held at 14 per cent since July 2016, is reduced, the economy will continue to struggle.

According to him, interest rates have to be reduced so that operators in key sectors of the economy such as agriculture and manufacturing, which employ a high number of people, will be able to borrow at interest rates that they can afford. In a report released by his firm last June, he stated: “With the MPR stagnant at 14per cent, commercial bank official lending rates range from 20-25per cent per annum while microfinance banks offer as much as 40per cent to 50per cent. Thus, it is no surprise that while the economy is growing at 1.95per cent (Q1’18), interest-rate sensitive sectors such as trade, real estate and construction continue to contract.”

Interestingly, assessing the Q2 2018 GDP data on a recent television programme, respected Economist and the CEO of Biodun Adedipe and Associates, Dr. Biodun Adedipe, also called for more attention to be paid to the development of key sectors such as manufacturing and agriculture.

He said: “If you look at the GDP for the Q2 of 2018, the real growth was driven by the services sector and services are meant to build upon the foundation of agriculture to start with, then you build manufacturing on agriculture and services come on top of those two. Until we give good attention to Agric and manufacturing, we may not get inclusive growth that we desire.”

Last line

Indeed, despite the concerns they expressed over the decline in Q2 2018 GDP, analysts at FSDH Research still took away some positives from the data.

They stated: “FSDH Research observes strong growth in the Information & Communication and the Construction sectors of the economy. The growth in Internet data consumption and increase in road and rail construction works across the country are the major drivers of the growth in the Information & Communication and the Construction respectively. We believe the two sectors can achieve higher growth rates given the enormous potential inherent in these sectors.

“Improvement in the business environment that can lead to job creation and payment of salary of workers, particularly among the state civil servants, will stimulate purchasing power.”

Credit: NewTelegraphonline