Nigeria’s GDP Grows by 2.8% Y-o-Y in third quarter of 2015 … Brace for Impact?

LAGOS, Nigeria, Capital Markets in Africa — The National Bureau of Statistics (NBS) released its Q3:2015 GDP report yesterday; which showed that in spite of the macroeconomic challenges faced during the period, the economy grew 2.8% Y-o-Y (to N18.0tn) in the quarter, 0.5% higher than Q2:2015 Y-o-Y growth (2.4%) but 3.4% lower than Q3:2014 (6.2%, Y-o-Y). The report also indicated that Q-o-Q, the economy expanded 9.2% in real terms, an improvement over 2.6%Q-o-Q growth recorded in Q2:2015.The improvement in GDP growth (relative to the previous quarter) in both Y-o-Y and Q-o-Q terms was majorly on account of increased oil production during the period which led to a rebound in oil sector growth and also pushed the sector’s contribution to GDP higher compared to the non-oil sector. This softened the impact of the third consecutive quarterly slowdown in the non-oil sector growth which was against the backdrop of the recession in the manufacturing sector and weaker financial services sector. In nominal terms, aggregate GDP stood at N24.3tn (+6.0% Y-o-Y).

Oil Sector rebounds as Oil Production Volume Increases
With continued volatility in oil prices, increased oil production in the review period served a cushioning function. Production volume in Q3:2015 was higher at 2.2mbpd (million barrels per day) compared to 2.05mbpd and 2.15mbpd of Q2:2015 and the corresponding period in 2014 respectively. Consequently, the Oil sector grew 1.1% Y-o-Y (from a 6.8% Y-o-Y contraction in Q2:2015) and 14.4% Q-o-Q. This rise in production thereby spurred the growth of aggregate economic output in Q3:2015 as oil contribution to real GDP rose to 10.3%, up from its 9.8% share in the previous quarter.

A Need for Improvement… Non-Oil Sector Growth Tapers
During the period under review, non-oil sector Y-o-Y real growth decelerated for the third consecutive quarter to 3.1% Y-o-Y from 3.5% recorded in Q2:2015 and 7.5% in the corresponding period in 2014. Hence, the contributions of the non-oil sector to the total GDP declined marginally to 89.7% from 90.2% in the previous quarter. The weaker performance of the sector was a fallout of weaker Y-o-Y (4.0% from 4.7% in Q2:2015) growth of the services sector which also contracted 0.2% Q-o-Q. The manufacturing sector which is a major contributor to the non-oil classification also contracted 1.8% Y-o-Y against 16.0% growth in the same period in 2014. On a Q-o-Q basis, however, growth in the manufacturing sector in Q3:2015 was 7.4%. We attribute the rebound (on Q-o-Q basis) to the lower base in the second quarter which was due to the slowdown in demand and a higher operating cost together with the fuel scarcity that nearly grounded the economy in Q2:2015. In Q3, the dissipation of some of these problems led to the improvement that was noticed in the sector. Nevertheless, the manufacturing sector is currently in a recession given the three consecutive Y-o-Y contractions in the sector. 

Brace for Impact?
We beam at the reality of an increased GDP growth rate in the review period which we view as a positive development, but not stellar given the economy has now recorded two consecutive sub-3.0% GDP growth, the weakest since the post-rebasing exercise. We expect Q4:2015 growth to remain subdued at 2.9%, hence lower our FY:2015 growth projection to 3.0% from 3.5%. However, we anticipate a rebound in 2016 on lower base factor and expected policies from the new economic team to prop up the non-oil sector. The sub-optimal level of growth may likely add to the incentives of fiscal authorities to opt for an expansionary fiscal policy in 2016. Whilst we do not expect the CBN to ease MPR at its next sitting next week, we expect committee members to back the CBN in keeping the financial system liquid in order to keep rates down in the fixed income market and stimulate credit intermediation and the economy at large. We also do not expect members to vote for a devaluation of the currency or lessening of foreign exchange restrictions given the statements credited to both fiscal and monetary authorities in the past two months that suggest little disposition of policy makers to altering the FX market dynamics. Committee members are likely to harp on more policy coordination and urge for more actions from the fiscal side.