6.1% GDP Contraction: Dust Yet to Settle – Analysts
Amidst a 6.1% contraction in gross domestic products, analysts said they expect second round effects of the economic disruption in the form of massive layoffs in the formal sector, corporate defaults, tightening of financial conditions and weaker capital spending.
In a report, Nova Merchant Bank Limited had predicted that the nation’s GDP would contract by 6.58 in the second quarter of 2020.
Compared to the spate of contraction in GDP in advanced economies in the first quarter of 2020, due to Covid-19 associated lockdowns, the Nigeria Q1 2020 GDP only showed moderate deceleration.
However, NOVA said the Q2 2020 GDP figures released showed the impact of the Covid-19 associated disruption in economic activities.
Overall GDP in Q2 2020 contracted by 6.10% year on year and contracted 5.04% quarter on quarter following contraction in both oil and non-oil sectors.
“While the headline GDP contraction came in lower than our forecast, following much slower rate of contraction in manufacturing, and crude oil, we are however surprised about the level of contraction in construction and trade”, the Merchant Bank stated.
The firm recalled that in its second half of 2020 economic outlook, it reckoned that the combined effect of modest compliance to planned OPEC+ cut with crude oil production averaging 1.85 mbpd (including condensates) will constrain growth in the oil sector over the rest of the year.
“We also noted that while a large fraction of the formal sector continues to operate sub optimally, the informal sector (which accounted for 65% of Nigeria’s 2017 GDP) was completely shut down for most part of the second quarter.
“Beyond actual shutdown of activities in the informal sector, the income to participants was materially hampered with a transmission to lower consumption and demand.
“Even with our expectation of the complete opening of the economy at the end of July with strict rules on social distancing over the rest of the year, we stated that the return to full-fledged economic activities might remain slow as complete containment without major escalation of Covid-19 could extend until the end of Q3 2020”, Nova stated.
In all, analysts stated that they see the second round effects of the economic disruption in the form of higher unemployment, weaker capital spending (in both public and private sector), corporate defaults and even more significant supply side disruptions.
“Our most positive scenario assumes that both fiscal and monetary measures will be sufficient to provide a fast reboot to the economy, complete containment of Covid-19 by the end of July and limited compliance with the OPEC+ cut.
“For the negative scenario, we assume that ongoing fiscal and monetary measures will be insufficient to provide necessary jolt for a fast restart of the economy”, the firm explained.
Nova said in this scenario, it expects a more telling impact of the second round effects of the economic disruption in the form of massive layoffs in the formal sector, corporate defaults, tightening of financial conditions and weaker capital spending.
Relative to forecast of 10% and 15% year on year contraction in construction and trade, the Q2 numbers delivered a much deeper contraction of 31.8% and 16.6% respectively, analyst said.
On an attribution basis, wholesale and retail trades contributed 2.67% to overall decline in Q2, followed by construction (1.41%), services (0.99%), manufacturing (0.80%) and crude oil (0.60%).
On balance, Nigeria posted 2.18% GDP contraction in H1 2020 compared to 2.11% growth in H1 19.
Services and agriculture composition to GDP improved to 38.7% and 23.2% from 37.7% and 22.3% in H1 2019 respectively.
More broadly, the oil sector contracted by 6.6% in Q2 20, largely reflecting lower crude oil production of 1.81 mbpd over Q2, relative to average production of 2.02 mbpd in Q2 19.
The non-oil sector contracted by 6.1%, below our estimate of 6.3% contraction, following cuts across most constituents.
Wholesale and Retail activities largely dominated the contraction in the non-oil sector, contributing 3% to the overall contraction, followed by building & construction, services and manufacturing of 1.6%, 1.1% and 0.9% respectively.
The services sector contracted 2.6% following poor outing in Transportation (-49.2% YoY), Real Estate (-22.0% YoY), professional services (-15.4% YoY) and Other services (-15.1% YoY).
Analysts stated that all of these sectors more than outweighed strong outing in ICT (+15.1% YoY), financial services (+18.5% YoY) and public administration (+2.0% YoY).
While the growth in the ICT emanated from increase in subscriber base by 12.9% year on year to 196 million as at June, the material growth in the financial services sector reflects the increase in credit creation by banks to meet up with the minimum loan to deposit ratio prescribed by the Central Bank of Nigeria.
Interestingly, the agriculture sector remained resilient to be the only constituent of the non-oil sector with a positive performance, which largely reflect the limited disruption to farming activities from the Covid-19 related lockdown.
However, Nova explained that it noted that the rate of distribution of farm produce was significantly affected by the restriction of movement.
For the manufacturing sector (-8.8%), contraction is not unconnected to the breakup in supply chains especially April, which resulted in material fall in the volume of production.
Cement, food, beverage & tobacco, textile & footwear with combined weight of 79% of manufacturing recorded contractions of 5.5%, 3.0% and 14.4% year on year respectively.
6.1% GDP Contraction: Dust Yet to Settle – Analysts