According to the data released by the National Bureau of Statistics (NBS), the Nigerian economy contracted by 3.62% YoY in Q3’2020. Consequent to the two consecutive quarterly decline in economic output, the Nigerian economy slumped into a recession for the second time in five years. As expected, the continued impact of the lockdown directive and lower economic activities continued to weigh negatively on economic output. However, the economic decline in Q3’2020 reflected an improvement relative to Q2’2020 due to the relaxation of lockdown and gradual reopening of the economy.
In Q3’2020, the oil and gas sector and trade sector were the two major laggards that drove the decline in real GDP. The trade sector contracted by 12% YoY in Q3’2020, while the oil sector contracted by 14% YoY in Q3’2020. Other major sectors that recorded a material decline include real estate (-13% YoY), professional, scientific, and technical services (-35% YoY), construction sector (-32% YoY), and other services (-73% YoY).
On the other hand, the bright sectors during the period were telecommunications & information services (+17% YoY), crop production (+1% YoY), cement (+279% YoY).
Lower Oil Output Amid OPEC Regulations
Total crude oil output stood at 1.67 million barrels per day (mbpd) in Q3’2020, relative to 2.04mbd average daily production in Q3’2019, thus implying an 18% YoY decline in production levels. The output levels in Q3’2020 was also 7% lower than daily 1.80mbpd output in Q2’2020. We attribute the Q3’2020 decline in oil production to the impact of OPEC’s oil cut agreement among oil-producing members. Nigeria’s daily production is estimated at 1.4mbpd; however, an additional estimated 300kbpd from condensates supports total production levels. The excess output in previous periods was offset by further cuts in Q3’2020, thus resulting in lower production levels during the period.
Increased Industrial Activities on the Back of Economic Reopening
The industrial sector recorded a significant improvement in Q3’2020. Although the industrial sector was still in the negative territory in Q3’2020, as it declined by 6.12%; the sectorial performance was much improved relative to a 12.05% decline in Q2’2020 when the coronavirus pandemic peaked in the Nigerian economy. Some notable sectorial improvements were recorded in the food, beverage & tobacco, cement, and construction sectors.
Sectoral Contribution to GDP
Trade Sector Still in a Decline
The trade sector improved in Q3’2020, although it declined by 12% YoY. In Q2’2020, the trade sector declined by 17% YoY. The challenges of the trade sector remain evident. Weak household consumption, foreign exchange illiquidity, the negative impact of COVID19 pandemic, and land border closure were some of the factors responsible for the decline in the trade sector.
Telecommunications: The Brightest Spot
The telecommunications & information services sector sustained its strong momentum in Q3’2020, reflected in the 17% YoY output growth in Q3’2020. The output growth in Q3’2020 was, however, lower than the 18% YoY output growth in Q2’2020. We attribute the slower growth in Q3’2020 to a normalisation of production activities, given the gradual reopening of the economy. We note that the lockdown directive by the national authorities resulted in a significant shift in the traffic patterns and demand for digital services, as households carried out their various activities through digital means.
Poor Harvest Dampens Agricultural Sector Output
The agricultural sector growth slowed to 1.39% YoY in Q3’2020, from 1.44% YoY in Q2’2020. We attribute the slow growth in the agricultural sector to a poor harvest, logistics challenges, and climatic factors (such as flooding) during the period. Overall, on a nine-month basis, the economy real GDP growth contracted by 2.69% YoY.
What are the Economic Prospects?
We expect the economy to contract by 2.50% in Q4’2020, on the back of the high-base effect on key sectors such as agriculture, financial institutions, and notably oil and gas. We expect the oil sector to contract by 14% – 15% due to our expectations of lower oil production. We also expect to see a sustained decline in the trade sector in Q4’2020; however, we believe that the decline will be moderated relative to Q3’2020 levels. Overall, we expect the Nigerian economy to contract by 3.16% YoY by FY’2020 (previous: -2.02%). Our revision was based on expectations of a deeper recession in the oil & gas sector, as well as sustained output decline in trade, real estate, and other services sectors.
Implications for the Financial Markets
In recent times, the monetary policy authorities have favoured a pro-growth stance. The monetary policy authorities implemented policies aimed at supporting households and businesses affected by the coronavirus pandemic. The pro-growth stance by the monetary policy authorities resulted in a low-yield environment, which induced a stock market rally.
However, the rising inflationary trend poses a downside risk. The headline inflation as of October 2020 rose to 14.23%, driven by higher food prices, as structural challenges around food prices persisted. The low-yield environment and the rising inflationary trend are inconsistent, in our view. While we remain curious and cautious about macroeconomic stability being threatened due to the rising inflationary trend, we think that the accommodative stance of the CBN will remain, to pull the economy out of recession.
