Earlier the National Bureau of Statistics (NBS) published the Q3-2020 GDP numbers. Unsurprisingly, economic activities contracted in Q3-2020, making it the second consecutive quarter of negative growth, implying a technical recession.
According to the report, real GDP declined by 3.6% y/y, representing an improvement from the Q2-2020 figure. Clearly, this improvement is attributed to the relaxation of lockdowns across the country, especially the three keys states (Lagos, Abuja, and Ogun).
Notably, of the 19 sectors in the NBS’s classification, 10 recorded contraction (previously: 13 sectors) while 9 sectors recorded expansion.
The bright spots remain Financial Services, Telecoms, Utilities, and Agric. Clearly, the decision by the MPC to cut rates by 100bps appears to be yielding the desired result. On the contrary, Oil Refining, Road, Air, Rail & Pipelines Transports, Accommodation & Food Services, as well as Construction were the worst hit.
Oil GDP: Still underwhelming amid weaker production
As expected, Oil output contracted -13.9% y/y in real terms in Q3- 2020 (vs +6.5% and -6.6% in Q3-2019 and Q2-2020 respectively). Notably, the y/y contraction was fueled by an 18.1% y/y decline in oil production to 1.67mbpd in Q3-2020 (the lowest level since Q3-2016) amid the country’s compliance to OPEC+ output quota during the period.
In terms of contribution to overall GDP, the oil sector contribution slid to 8.9%, (vs 9.8% and 8.9% in Q3-2019and Q2-2020 respectively).
Non-Oil sector: ICT, Financial services and Agric remain the bright spots
In Q3-2020, the Non-Oil sector declined by -2.5% y/y. Non-oil sector contribution to real GDP remained robust, at 91.2% in Q3-2020. More specifically, Trade sector output declined by – 12.1% (vs 4.4% in Q3-2020), Transportation sector declined by -42.9%, (vs -49.1% and an 18.3% expansion in Q1-2020) as Nationwide wide disruptions along with the closure of schools by the Federal government saw a decline in output levels.
These same factors affected Education sector growth, which stood at -20.7% in Q3- 2020, an improvement from a decline of –21.9% in Q2-2020 but well below an expansion of 1.9% in reported in Q3 2019. As highlighted above, the ICT, financial services as well as the Utility sector remained bright spots buoyed by demand for virtual working services as well as E-banking, Trading and Other non-interest income lines.
Agricultural sector: Weaker still
The agriculture sector expanded by 1.3% in Q3-2020, weaker than 1.58% in Q2-2020 and 2.28%, this is rather disappointing considering the sustained government interventions and favourable policy environment. Crop Production which accounted for over 90% grew by 1.38% in Q3- 2020 from 1.44% in Q2- 2020 and 2.41% in Q3- 2019. Livestock also expanded by
2.2% in Q3- 2020 from 2.2% in Q2 2020. Forestry grew by 2.5% in Q3 2020 from 1.0% in Q2- 2020 and 3.7% in Q3- 2019. Fishing under the agriculture contracted by -2.07% after expanding 5.6% and 1.6% for its first decline in the last 6 quarters.
Manufacturing sector: Manufacturing activities improves to -1.5%y/y
The Manufacturing sector contracted by -1.51% in Q3 2020, an improvement from the -8.78% in reported Q2 2020 and 1.1% in Q3 2019. Clearly, the outbreak of COVID almost halted manufacturing activities in the early parts of the pandemic. With reopening of the economy and increased safety measures adopted by manufacturers, manufacturing activity seemed to be picking up as foreshadowed by CBN’s Purchaser Managers Index which climbed above the 50point threshold as of November 2020.
However, one of the headwinds that have come with COVID is weaker export earnings, pressure on customer demand and foreign exchange scarcity, we expect manufacturing output growth to stay muted. Most notably, Cement, Food and Beverage grew by 11.9% and 6.8% (vs 6.8% in 2.9%). Ultimately the sector was dragged down by the oil refining activities which fell by 68.2% following a decline of -67.6% in Q3 2019, and another decline of -30.7% in Q3-2019.
Outlook: Q4-2020 GDP to further improve
For the rest of the year, we maintain that the sharp contraction recorded in Q2-2020 is as worst as it can get for the year considering the marked improvement observed in the Q3- 2020 numbers. If the Purchasing Managers Index is anything to go by, the recent improvement observed in manufacturing and non-manufacturing PMI, which indicated a rebound to the 50point threshold foretells a more optimistic future.
For context, we expect the growth observed in the ICT, Financial services, Agric and Utilities to not only be sustained by further supported by improvement in the Oil & Gas sector considering the announcement of a vaccine for Covid-19.
Although we imagine that compliance to OPEC+ production cut agreement (capped at 1.50mbpd from August-2020 to Dec-2020) and compensation for prior months overproduction with deeper cut may limit production to below pre-COVID-19 levels of above 2.0mbpd, we think the improvement in oil prices will further soften contraction in the oil & gas sector.
Again, the full re-opening of economic activities, as well as end of the year festivities, is expected to buoy consumer demand, thus, enhance output level in the trade and manufacturing sectors.
The above notwithstanding, the worsening state of macro indicators including rising inflation, exchange rate divergence as well as other policy constraints will continue to limit the pace of recovery due to the direct impact on disposable income. Adjusting our model estimates for all the above, we maintain that real GDP growth forecast for FY-2020E to come between -2.5% and -3.14%.