Following a surprise comeback from the lockdown-induced recession in the last quarter of 2020, the economy expanded by 0.51% y/y (Vetiva: +0.75% y/y) in Q1’21, confirming a recovery from the recession.
On the surface, the recovery appears fragile, given the sub-optimal performance and lingering impacts of the pandemic on some sectors of the economy.
However, we note that in both situations, the corresponding periods were pre-pandemic and thus, high-base periods. While the non-oil sector expanded slightly (+0.79% y/y), the oil sector relapsed (-2.21% y/y).
Sectoral performances: A mixed bag
Assessing the economy from the lens of the agricultural, industrial, and services sectors, the agricultural sector expanded by 2.28% y/y in Q1’21, driven majorly by the development finance initiatives of the Central Bank of Nigeria (CBN), including the Anchor Borrowers Program, which has funded over
2 million projects since inception. With most of these projects targeted at farming, the crop production sub-sector (+2.31% y/y) remains the major driver of output growth in that segment, contributing 88% to agricultural output.
While the agricultural sector exhibited resilience during episodes of downcycles, the Industrial sector was not so lucky. In Q1’21 however, the sector expanded slightly, growing by 0.94% y/y (Q1’20: 2.26% y/y) driven by the expansion in the manufacturing sector (+3.40% y/y). However, this growth was softened by the contraction in the mining and quarrying sector (- 2.19% y/y) and more specifically, the crude petroleum and natural gas sub- sector (-2.21% y/y). We note that despite the strong rebound in oil prices, the mining sector was held back by sustained OPEC production cuts. Although oil production improved 10.3% q/q to 1.72 mb/d, the corresponding output in the previous year (2.07 mb/d) could not be attained due to the existence of OPEC production quotas.
While the mining sector contracted, the Manufacturing (+3.40% y/y) & Construction (+1.42% y/y) sectors expanded. The resilience in the Manufacturing sector was driven by improved volumes from the Food,
Beverage, and Tobacco sub-sector (+7.11% y/y), which was responsible for 96% of the growth in manufacturing output. We believe the stellar performance of the sector is due to increased product offerings to suite the compressed wallets of the lower and middle class, as reflected in the ‘sachetization’ of FMCG products, to drive volumes. This, coupled with the defensive nature of the FMCG sector in recessive periods, enabled the sector to defy the pandemic-induced squeeze on consumer wallets to sail through.
However, unlike the Food, Beverage, and Tobacco sector which benefitted from local demand, the Cement sector (+11.20% y/y) recorded double-digit expansion on the back of healthy export orders.
We note that the sector continues to be a high-flier, consolidating gains from preferential access to the borders before the late reopening of the border last year. The domestic construction sector also expanded (+1.42% y/y), reflecting the impact of budget execution, and renewed private investment in the real estate sector.
While these sectors exhibited resilience, we note the underwhelming performance of the Textile, Apparel, and Footwear sector (-4.53% y/y), despite Nigeria’s compelling population metrics and the glaring clothing demand. The slump in the sector can be attributed to currency adjustments and higher pump prices, which raises the cost of production and makes the sector uncompetitive amid a sustained local appetite for foreign, custom-made products.
While industrial real output increased slightly, the services sector – which constitutes over half of national output – contracted by -0.39%. Unlike the agricultural and industrial sectors, the services sector was a mixed bag as 10 sub-sectors contracted (constituting 61% of services output), while 3 sectors expanded (constituting 38% of services output). The contraction in the services sector was driven majorly by the Trade (-2.43% y/y), Transport & Storage (- 21.89% y/y), Professional Services (-3.84% y/y), Education (-6.20% y/y) and Other Services sectors (-2.95% y/y).
The contraction in the Trade sector reflects the impact of the pandemic on supply chains and protection of critical sectors under the AfCFTA arrangement as well as lower oil exports. We note that the sector is yet to resurrect from the 2016 recession.
The transport sector (-21.89% y/y) continues to reel from pandemic-induced supply chain disruptions, increased remote working activities, higher fuel prices, and insecurity. While air transport (-11.78% y/y) became the next best alternative, the surge in fare prices as a result of the weakness in the naira, stifled growth in the sector. Education (-6.20% y/y), like many other contact-driven sectors, remains aground due to the slow uptake of smart e-learning solutions and dependence on outdated teaching methods.
Bucking its stellar growth trend, the Financial Services sector (-0.46% y/y) contracted marginally, as banks exercised caution over creation of risk assets, despite statutory loan-to-deposit ratio limits and punitive CRR debits. The creation of the Special bills and rise in yield environment must have also influenced rotation into fixed income instruments.
Within the services sector, there were three outperformers, the Information, and Communication sector (+6.47% y/y), the Human health & social services sector (+4.65% y/y), and the Real estate sector (+1.77% y/y). While the ICT sector expanded in Q1’21, we note that this is the slowest expansion in 12 quarters.
We attribute this underwhelming performance to regulatory restrictions on sim registrations over NIN-SIM link registrations. While this restrained the ICT sector from riding on the pandemic-induced change in consumer behavior, the sector still emerged as the largest contributor to GDP. The Human, health & social services sector (+4.65% y/y) was a direct beneficiary of pent-up demand for medical services due to the proliferation of medical outreaches and humanitarian services to improve the wellbeing of individuals.
Finally, the Real Estate sector (+1.77% y/y) expanded for the second time in a row after six quarters of recession, due to renewed investment by the private sector. We note that there are initiatives that could unlock growth in the sector in the near to medium-term, especially as the government plans 300,000 housing units under the Economic Sustainability Plan.
Stronger rebound ahead
In the Agric sector, we believe improved crop production could buoy agricultural output. However, we express cautious optimism, as insecurity, which has stifled farming activities, could slow down output growth in the sector. With the ban on open grazing in several states, this could ease the current pressures on farming activities.
However, the sector could ride on the previous year’s favourable base. Efforts in resolving the subsisting security situation are necessary to de-risk the sector and drive investments. In addition, improved mechanized farming methods and Research & Development must be fulfilled to improve agricultural productivity, as growth in the sector has been underwhelming relative to population growth.
Growth in the industrial sector could ride on the back of private and public investment in the real estate sector and dynamic marketing strategies, which kept the manufacturing sector afloat so far. However, this could be checked by output restrictions in the mining sector. Despite the easing of production cuts, we note that the oil sector may still underperform in Q2’21, due to the continued commitment to OPEC production cuts and delays in the passage of the Petroleum Industry Bill, especially as Nigeria’s biggest oil producer, Shell, plans to offload its Nigerian oil assets.
Thus, implementing reforms would be critical in incentivizing investments in the oil sector. The manufacturing sector could rebound sharply as economic activities move into full swing, with recovering consumer demand and proposed public investment in residential housing. This could dovetail into the real estate sector, amid crowdfunding and other initiatives targeted at improving private investment in real estate.
The services sector could record marginal gains in Q2’21, driven wholly by low- base effects. Given the extension of the NIN-SIM linkage registration deadline
to June 2021, the ICT sector may grow at a slower pace in Q2’21 and expand sharply in the outer quarters. Trade could contract marginally, supported by low base effects and the reopening of the borders.
The transport sector could rebound strongly from pandemic lows in Q2’21 due to less stringent restrictions. However, the surge in transport costs and increased adoption of digital methods could limit potential gains. Growth in the financial services sector could remain subdued by sluggish credit growth given the elevated risk in the operating environment of several businesses.
Ultimately, we anticipate an unusual rebound in the economy, having aced pre- pandemic base periods in the past. Many of the sectors, which were held back by the lockdowns, have had time to scale back to full operations.
However, we anticipate a modest 4.47% y/y recovery in Q2’21 (Q2’20: -6.10% y/y), driven by favorable base effects, definite albeit slower growth in the telecommunications sector, moderate growth in agricultural output and tempered by a slight relapse in the mining sector.
We also factored in the weakness in the naira, higher costs of doing business and slow recovery in high-contact sectors. Furthermore, we expect the rebound to filter into the third and fourth quarters of the year, though at a slower pace.
Barring any shocks from COVID-resurgence in further quarters of the year, we expect FY’21 GDP to grow by 3.13% y/y (FY’20: -1.92% y/y).
