28 August 2018 : Compared to Vetiva and Consensus estimates of 1.6% and 2.0% respectively, Nigeria’s reported Q2’18 real GDP growth of 1.5% is disappointing. Although analyst's estimate was close to the reported figure, the composition of GDP growth in the period is somewhat surprising. There was a more marked slowdown in agriculture and oil production than analysts had anticipated, growth in the services sector was robust and the pace of industrial activity slowed, even though analysts had expected Manufacturing GDP growth to outpace Services—like in Q1’18. The general weakness and volatility of the numbers show the brittleness of the broader economy, and analysts note that economic growth is too negligible to impact living standards or inequality. 

Middle Belt violence decimates agriculture 

At 1.2% y/y, this period’s growth in agriculture output is abysmal (5-year Q2 average: 3.5% y/y), and it is hard not to finger the herdsmen crisis as the culprit here. According to the Armed Conflict Location & Event Data Project, 1,738 people have been killed during the violence so far in 2018, the highest number on record. Notably, analysts had already begun to see the effect of this crisis in food prices as monthly food inflation rose from 0.9% in April 2018 to 1.6% in June 2018 (highest in a year). Even as all of this is problematic, analysts are more concerned that a resolution to the crisis would not ease the pressure on agriculture output given the number of people that have been displaced from their communities—a reported 300,000 people in Benue State alone, many of whom are farmers. Thus, efforts to bring an end to the scourge must be complemented with a comprehensive strategy to rehabilitate the Middle Belt region. The ERGP target of 6.9% average agriculture growth between 2017 and 2020 looks unattainable and analysts project FY’18 agriculture growth as low as 1.9% y/y (Q3’18: 1.8% y/y), the weakest since the 1983 recession.  

Oil sector slumps, but recovery lies ahead 

Analysts had anticipated a slowdown in oil production given stoppages in Forcados loadings and Force Majeure on Bonny Light exports for most of Q2’18. However, recorded oil production of 1.84 mb/d still underperformed analyst's 1.90 mb/d estimate, causing the sector to contract 3.8% y/y. Full production activities resumed in late-July, and initial estimates suggest production rose by nearly 0.1 mb/d in the month. Analysts estimate output of 1.95 mb/d and 2.10 mb/d for Q3 and Q4 respectively, bringing average FY’18 output to 1.97 mb/d, and reflecting a 3.7% y/y growth in the oil sector. 

Manufacturing output volatility underscores underlying weakness 

Growth in the manufacturing sector declined from 3.4% y/y in Q1’18 to 0.7% y/y in Q2’18, partly driven by a 21% y/y decline in oil refining, even though it accounts for just 2% of total manufacturing output. Analysts note that oil refining output is very volatile due to the inconsistency of Nigeria’s refineries and Q2’17 was a relatively bumper quarter (making it a high base). In addition, analysts also observed a slowdown in the growth in cement production from 5.3% y/y to 3.8% y/y (9% of sector) and food & beverage output from 5.5% y/y to 1.2% y/y (46% of sector). All of this indicates that the rebound in consumer demand is not resilient, although analysts expect it to be supported by pre-election spending in the latter part of the year. Overall, analysts downgrade their industrial growth forecast from 3.7% y/y to 2.6% y/y. 

ICT drives services to three-year high 

The services sector grew at 2.6% y/y, the fastest since Q4’15, and rebounding from a contraction of 0.5% y/y and 0.7% y/y in Q1’18 and FY’17 respectively. This growth was mostly spurred by a 12% y/y expansion in ICT, driven by strong growth in both Telecoms and Broadcasting. The construction sector also turned positive to post growth of 8% y/y, the highest since Q1’15, whilst Real Estate (-34%) and Trade (-2%) contracted once more but at a slower pace. The growth in the services sector is a welcome surprise, but analysts highlight that it is not broad-based and there is still weakness in a number of critical sub-sectors. Analysts have upgraded their Q3’18 and FY’18 projections from 0.5% y/y and 0.3% y/y to 1.2% y/y in both cases.

Multiple revisions to forecasts 

Analyst's near-term outlook for agriculture and oil production is more downbeat given the shocks suffered this year, though analysts are more optimistic about medium-term oil production. Analysts also have a more bearish outlook for the manufacturing sector and a more bullish outlook for services, in line with Q2’18 data. There are not many growth catalysts in 2018, and although election spending would support aggregate demand, rebounding inflation and the threat of insecurity are a worry. Analyst's forecasts for Q3’18 and FY’18 GDP growth are 1.2% y/y and 1.7% y/y respectively (previous: 1.7% y/y and 1.9% y/y), and analysts expect the underlying economy to remain weak going into 2019.

Reporting for EasyKobo on Tuesday ,28 August 2018 in Lagos, Nigeria

Source: Michael Famoroti from Vetiva Capital Management Limited