The Nigerian economy reported a positive surprise in its latest Q4’2020 GDP performance, as the economy exited recession. Real GDP grew by 0.11% YoY in Q4’2020, after an economic contraction in Q3’2020 (-3.62%) and Q2’2020 (-6.10%).
The consensus expectation was for the economy to exit recession in Q2’2021. Earlier in 2020, the coronavirus pandemic disrupted economic activities due to movement restrictions to contain the virus’ spread.
The downturn in economic activities that followed drove the economy into a recession for the second time in four years. However, unlike the previous recession cycle in 2016, when the economy contracted for five consecutive quarters, the economy declined two straight times before rebounding to growth in Q4’2020.
The growth drivers in Q4’2020 were the Agricultural and Services sectors, which grew by 3.42% YoY and 1.31% YoY, respectively. The Industrial sector declined by 7.30% YoY. Furthermore, Oil GDP declined by 19.76% YoY, while the Non- Oil GDP grew by 1.69% YoY.
By sectoral breakdown, the Crop Production sector, Telecommunications sector, Real Estate sector, and Trade sector were the top performers in Q4’2020. On the other hand, the Crude Oil sector, Manufacturing sector, and Finance & Insurance sector were the major laggards.
The Crop Production sector grew by 3.68% YoY in Q4’2020, representing the highest growth recorded over the last eight quarters. We note that a low base in Q4’2019 drove the growth in the Crop Production sector. On a quarter-on-quarter (QoQ) basis, the sector declined by 5.83%.
In our view, the QoQ output decline reflected the security and environmental challenges in the major food-producing regions of the economy. The Crop Production sector contributed 24% to the total GDP.
The telecommunications sector rode on the positive momentum that was induced by the COVID-19 pandemic. Due to the movement restrictions and lockdown measures, digital services demand rose as households resorted to digital channels to carry out daily activities.
The rise in voice and data traffic drove the output growth in the telecoms sector. The telecoms GDP rose year-on-year by 17.64%, 17.36%, 18.10, and 9.71% in Q4’2020, Q3’2020, Q2’2020, and Q1’2020, respectively. The Telecommunications sector contributed 12% to the total GDP.
Real Estate Sector:
The Real Estate sector rebounded to growth in Q4’2020 after recording a contraction in the preceding six quarters since Q2’2019. In Q4’2020, the sector grew by 2.81% YoY. We attribute the rebound to the low-yield environment.
Based on our assessment, we posit that real estate demand improved as individuals and households sought alternative investments and leveraged the low-interest-rate environment. Typically, a negative relationship often exists between interest rates in the economy and real estate output. The Real Estate sector contributed 6% to the total GDP.
Although the trade sector contracted in Q4’2020, the output decline improved to 3.20% YoY, from an output contraction of 12.12% in Q3’2020. On a QoQ basis, the trade sector grew by 22%.
Crude Oil Sector:
The Crude Oil sector worsened in Q4’2020, majorly due to a 22% YoY decline in oil production from an average of 2.00mbpd in Q4’2019 to 1.56mbpd in Q4’2020. On a QoQ basis, daily production lowered by 6.59%.
We attribute the significant decline in oil production to the Organisation of Oil Exporting Countries (OPEC) and its allies’ decision to cut daily production to support the crude oil price.
The oil cut agreement implied a daily production estimate of 1.70mbpd; however, the daily 1.56mbpd output in Q4’2020 possibly suggests an extra cut to compensate for an overproduction Q2’2020.
The manufacturing sector recorded a 1.51% output decline in Q4’2020, mainly due to a high base in Q4’2019. On a QoQ basis, the sector output grew by 5.61%. While subsectors within the Manufacturing sector such as cement and food manufacturing rose by 6.59% YoY and 2.15% YoY, respectively in Q4’2020, a 5.55% YoY decline in textile, apparel and footwear subsector dragged the overall Manufacturing sector performance.
Finance & Insurance Sector:
A high-base effect drove the Finance and Insurance sector’s 2.48% output decline in Q4’2020. On a QoQ basis, the sector grew by 26.07%, driven by the low-yield environment and regulatory stance towards boosting private sector credit growth.
On an annual basis, the Nigerian economy (real GDP) declined by 1.92% YoY, on the back of a weak level of economic activities induced by the coronavirus pandemic that took a toll across the economies of the world. Over the last six years between 2014 and 2020, the Nigerian economy real GDP CAGR stood at 0.70%.
Implications for the Financial Markets
The Q4’2020 GDP outcome came as a positive surprise, given the consensus expectations of a negative economic growth till at least Q2’2021.
Nonetheless, we note that the economic growth in Q4’2020 was fragile. There is a need to consolidate fiscal and monetary policies further to support the economy to higher growth levels.
In our view, we do not expect to see a material deviation in the financial markets. Although the GDP scorecard was above expectations, we believe that the economic recovery had been factored in the pricing of assets across the financial markets.
Also, we believe that the activities across the financial markets are influenced mainly by other macroeconomic variables such as interest rate and exchange rate. Therefore, we expect to see a muted reaction in the financial market.
We revise our GDP estimates and now project a 2.80% GDP growth for FY’2021, from the previous 2.17% projection. We maintain our economic growth drivers to stem from the Information and Communication, Agricultural, and Trade sectors.
We are cautious about the Real Estate sector’s growth sustainability, and we expect to see the continued dampened output in the Manufacturing sector.