The much-anticipated Gross Domestic Product (GDP) data for Q2’2020 was eventually published this week by the National Bureau of Statistics (NBS). The GDP is an aggregated indicator of economic prosperity, and it is measured both on an annual and quarterly basis.
According to the official data by the NBS, economic activities in Nigeria in Q2’2020 (Apr – June) contracted by -6.10%, owing mainly to the complete shutdown of movement and business activities in major economic hubs (Lagos, Ogun, FCT, Kano, and Rivers) between April and May 2020 in an attempt to tame the spread of the Coronavirus pandemic by the government.
Interestingly, the depth of the Q2 GDP contraction came in stronger than our projection of a -4.0% contraction and the CBN staff forecast of a -1.03% contraction as contained in the July 2020 Monetary Policy Communique released by the apex bank earlier in the month.
While the Q2’2020 GDP data may now be considered historical, there are several pointers from the data that shows that the Nigerian economy is heading for a second recession in the space of five years by the end of Q3 (September), given the performance of some leading indicators – the Purchasing Managers’ Index (PMI), the Headline inflation rate, the Exchange rate, and Nigeria’s crude oil output and global prices in two months into Q3 (i.e. July and August).
Also, in the two months used so far in Q3’2020 (July and August), the PMI has remained below the expansion threshold of 50 index points; the inflation rate has nudged up to a two year high of 12.82% in July; the official exchange rate has further weakened to ₦379/$1 in July from ₦361/$1 in Q2’2020; and Nigeria’s average crude oil output has dropped by c.400tbpd to 1.4mbpd (according to OPEC report), from 1.81mbpd in Q2’2020.
By aggregating the impact of these macroeconomic indicators, the Nigerian economy is unlikely to avoid a recession by the end of Q3’2020, given the direct negative effect of these developments on domestic production and consumption capacity.
Secondly, the depth of the contraction recorded in Q2’2020 outpaced both the economy’s average growth rate in the last six years (which is 1.27%) and the estimated population growth rate of 2.7%p/a. Given the recent historic weak pace of Nigeria’s economic growth, it is very unlikely the economy will report a GDP growth in Q3’2020, given the weak fundamentals.
Thirdly, two of the three-sector constituents of the Non-oil GDP – the Industries and Services sectors, contracted by -6.78% and -12.05% respectively in Q2’2020, save for the Agriculture sector which grew paltry by 1.58%. Given that these two sectors (Industries, 21.87% and Services, 53.49%) which contributed ¾ (or 75%) of the GDP size have shown no sign of strong recovery in the two months into Q3, we do not expect any sharp improvement in the last month of the quarter (i.e. in September) that can drive strong growth in the two sectors.
Fourthly, Nigeria oil production averaged 1.81mbpd in Q2’2020, and this volume is projected to have declined to 1.40mbpd in Q3 given the strict enforcement of the output cut agreement by the OPEC+ cartel, of which Nigeria is one of the erring producers compelled to cut output since the beginning of July. Hence, we expect the oil component of the GDP to further contract in Q3’2020 despite the improvement in the average price of crude oil to $40.85pbl in the two months into Q3 compared to $31.64pbl in Q2’2020.
In conclusion, we project a GDP contraction of between -2.8% and -3.5% in Q3’2020. This relatively mild contraction (compared to Q2) we expect to be aided by the gradual improvement in economic activities as a result of the further easing of the lockdown directives, and the sustained expansion of the Telecoms & ICT, Financial Services, and Agriculture sectors in the quarter.