24 Aug LCCI COMMENTS ON SECOND QUARTER GDP REPORT
The Lagos Chamber of Commerce & Industry notes with concern the decline in national output in Q2-2020. According to the GDP report by the National Bureau of Statistics, the economy contracted by a record 6.1 percent in the second quarter, and this marks the steepest quarterly contraction in Nigeria’s recent economic history. The contraction in Q2-2020 also ended the three-year trend of marginal but positive growth era the Nigerian economy had after exiting recession in Q2-2017.
The 6.1 percent contraction is not a surprise as the number reflects the profound impact of the covid-19 pandemic on the Nigerian economy. The containment measures including lockdown, national curfews, inter-state travel bans, closure of schools, airlines, businesses imposed globally and domestically to slow the spread of the pandemic, significantly disrupted global supply chains and destabilized commercial, business, investment, and trade activities. In addition to these, it was also in the second quarter that the country was confronted with weakening oil prices, low crude production, huge volume of unsold crude cargoes, foreign exchange scarcity, depleting external reserves, portfolio outflows in the financial markets, disruption & adjustment of the 2020 budget, revenue collapse from oil and non-oil sources, rising spate of job losses, high food prices, among others.
We note the weak performance of the economy at sectoral level, particularly among critical sectors with potentials to facilitate economic diversification. While some sectors did expand in the second quarter, most of the sectors that reported positive growth in the first quarter plunged into sharp contraction while others maintained their position in recessionary territory.
In all, 46 sectors, 19 sectors contracted; 14 sectors are in recession, 11 sectors expanded, and two sectors reported slowdown in growth.
|Performance||No of Sectors||Sectors|
|Contraction||19||Crude petroleum & natural gas, cement, food, beverage & tobacco, textile, apparel & footwear, wood& wood products, pulp & paper products, plastic & rubber products, basic metal, iron & steel, construction, road transport, rail transport, water transport, air transport, publishing, motion pictures & music recording, arts, entertainment & recreation, insurance, education, other services.|
|Recession||14||Metal ores, quarrying & other minerals, oil refining, non-metallic products, electrical & electronics, other manufacturing, electricity, gas & steam, trade, accommodation & food services, transport services, post & courier services, real estate, professional, technical & scientific services, administrative & support services,|
|Expansion||11||Livestock, fishery, coal mining, chemical & pharmaceutical products, motor vehicles & assembly, water supply & sewage, telecommunication, broadcasting, financial institutions, public administration, human health & social services|
|Slowdown||2||Crop production, forestry|
OIL SECTOR: Oil & gas sector contracted by 6.65 percent in Q2-2020 compared to 5.06 percent expansion reported in the preceding quarter. The huge contraction was driven by low crude production, which averaged 1.81 mbpd in the quarter, and which is the lowest since Q4-2016. We attribute the low level of crude production in Q2-2020 to OPEC+ production cut agreement (which became effective in May 2020), aimed at rebalancing the oil market. We also note that the economy experienced stockpiles of unsold crude cargoes particularly in April and early May, due to collapse in crude demand from Asia and Europe. In addition to these, the steep contraction was also fuelled by weakening oil prices witnessed in the quarter. We note that oil prices averaged $33/bbl in Q2-2020 compared to $51/bbl in the first quarter.
NON-OIL SECTOR: The non-oil sector contracted by 6.05% percent in the second quarter, driven by the more pronounced impact of global disruption, lockdown, domestic movement restrictions, flight suspension, restricted international trade as well as subdued commercial & business activities. Key sectors of interest to us include:
- Trade: Trade is Nigeria’s second biggest sector by percentage contribution to output. We note that the sector has been in recession since Q3-2018 due to the closure of the land borders, port inefficiencies, and weak consumer spending among other structural challenges. These challenges coupled with the global pandemic magnified the magnitude of contraction to 16.59% in Q2-2020 from -2.82% reported in Q1-2020.
- Agriculture: Agriculture grew at a slower pace in Q2-2020. The sector expanded by 1.58% in Q2-2020 compared with 2.2% in Q1-2020. Crop production, which accounts for over 85% of agricultural output, recorded moderation in growth from 2.38% in Q1-2020 to 1.44% in Q2-2020. The slowdown was driven by disruption to the food supply chains, difficulties experienced by farmers in conveying their products inter-state and insecurity in food producing areas.
- Manufacturing: We note with concerns that the manufacturing sector has been struggling with growth before the outbreak of the novel coronavirus, despite being one of the biggest beneficiaries of CBN’s loan-to-deposit policy. Manufacturing sector contracted by 8.78% in Q2-2020 compared with a marginal 0.43% growth in the previous sector. We note that of the 13 sub-sectors in the manufacturing space, only two sectors – chemical & pharmaceutical products and motor vehicles & assembly reported positive growths, while the other 11 sub-sectors had negative growth. In our view, we believe the weakness of manufacturing sector was due to global & domestic supply chain disruptions, foreign exchange illiquidity, weak consumer spending and high operating costs.
- Real Estate: We note that performance of the real estate sector has been weak before the pandemic. The sector entered recession in Q3-2019 due to fragile macroeconomic conditions, weak demand for commercial real estate assets coupled with low level of investment in the sector. The sector contracted by 21.99 percent in Q2-2020. We note that lockdown and social distancing rules made it difficult for real estate players to interact and transact with clients, and this led to suspension of most real estate projects.
- Aviation: We believe the suspension of domestic and international flights as part of the containment measures to curtail the spread of Covid-19 significantly destabilized air transport industry, evidenced by the 57 percent contraction reported in the second quarter.
- Arts, Entertainment & Recreation: The shutdowns of hotels, bars, event centres and relaxation centres equally weighed on the arts, entertainment, and recreation industry, and this explains the 8.93% contraction reported in Q2-2020 compared to 1.53% growth recorded in the first quarter.
- ICT: The ICT sector sustained its position as the country’s fastest growing economy. Growth of the sector expanded faster by 15.99%in Q2-2020 compared with 9.99% in the first quarter, driven by 18.10% expansion of the telecommunication sector. We believe the faster growth pace of ICT was largely driven by increased data consumption due to the social distancing and remote working from home operation policies implemented by almost all Nigerian corporates during the lockdown.
The Nigerian economy is currently in dire straits. Apart from the urgent need for policymakers to reflate the economy, it is critically important for policymakers to also tackle the twin challenge of rising inflation and unemployment rates. With inflation and unemployment at record high of 12.82% and 27.1% respectively.
We note that the fiscal and monetary authorities have implemented several policies to mitigate the adverse impact of the covid-19 shock on the economy and business environment. Noteworthy is the Nigerian Economic Sustainability Plan, which proposes a N2.3 trillion stimulus package, equivalent to 1.5% of GDP. We acknowledge the commitment of government to support the economy and protect businesses.
Although there has been a gradual reopening of the economy, we note that business and commercial activities remain subdued, evidenced by July PMI readings which shows business activities is still in the recessionary threshold.
Given the protraction of the Covid-19 pandemic and lack of a vaccine, there is high possibility that the economy would contract, though marginally, in the third quarter and this would mark the second recession under the watch of the current administration.
It is imperative to ensure effective synchronization of fiscal and monetary policies and proper implementation of the sustainability plan among other measures. The structural bottlenecks to productivity in the economy needs to be urgently removed through a mix of fiscal, monetary and regulatory measures. It is imperative to reduce policy uncertainties in order to inspire the confidence of investors, both domestic and foreign.
This would give the economy a boost in the near term. However, growth will continue to remain weak and fragile till the first quarter of 2021.
Dr Muda Yusuf