Nigeria’s GDP in Recovery Mode, Analysts See 3.1% Growth
Nigeria’s gross domestic product, GDP, increased 5.1% in the second quarter after a tepid 0.51% growth in the first quarter of 2021. However, the two times growth trajectory recorded came after GDP shrank 1.92% in 2020.
The two times growth, according to CardinalStone Partners projection, could deliver a 3.1% year on year GDP growth in 2021.
“Our optimistic growth expectations reflect more substantial recoveries in the second and third quarters with expansions of 7.9% and 3.4%, respectively, while growth in the fourth quarter could be modest at 1.1%”, CardinalStone projected.
For the third quarter, Vetiva Capital analysts projected GDP growth of 4.10% following an expected moderation in a quarter on quarter growth.
While CardinalStone predicted a 7.9% uptick for the second quarter, anchored on the base effect in 2020, the economy delivered 5.1%, thus underperformed projection by a 280 basis point.
“Imperatively, we highlight that our seemingly optimistic growth outlook reflects the low base effect of the previous year due to the impact of the COVID-19 pandemic on economic activities”, CardinalStone added.
It was recognised that the second and third quarters of 2020 was the most hurt as lockdown measures stifled production and disrupted the supply chain, leading to inflationary pressure.
In addition to the high rate of job losses, analysts said the inflationary pressure strained domestic consumption and led to a recession.
The record shows that the trade sector shrank 16.6%, Manufacturing dropped 8.8%, Crude Petroleum & Natural Gas saw a slowdown of 6.6%, Real Estate fell strongly at 22.0% and Construction tumbled 31.8% in sectors in the second quarter of 2020.
“While we believe that a rebound in these sectors could lead to the highest quarterly GDP growth in over 25 quarters, we note that actual activity levels are likely to underperform second quarter of 2019, indicating a lingering pandemic-induced output gap”
Spotting the downside risk, analysts at CardinalStone said growing insecurity remains the biggest threat to Nigeria’s attainment of potential GDP growth.
Analysts said beyond the accelerated recovery expectation of 2021, Nigeria’s possible return towards a level of sustainable growth remains the perennial concern.
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“In our view, post Q3’21, the economy is likely to slow down its pace of growth to around 2.0% levels, highlighting the lingering macro vulnerabilities that last year’s low base may have masked”.
Explaining the tendency for the slowdown, CardinalStone said before the 2016 recession, the economy grew by 4.7% on average in the preceding thirteen quarters. Since then (over twenty-five quarters), the country has only once recorded growth above 2.5%.
Analysts said damage to already frail economic structures, alongside weaker consumption and investments, have dented the economy with high unemployment an unsurprising fallout.
Consequently, it was noted that agitations have risen just as quickly as living standards have deteriorated, and these, worryingly, may have cascaded into severe growth-constraining security concerns for the country.
An unsurprising economic fallout of the pandemic was the surge in inflation driven partly by supply chain disruption, the firm added.
Analysts said the pent-up demand from stockpiling of necessities over lockdown fears may have also heightened the supply-demand gap.
These, according to CardinalStone, in addition to the impact of multiple foreign exchange devaluations, PMS price hikes and electricity tariff hikes inevitably accentuated the inflationary pressures witnessed in 2020.
In 2021, inflation may have continued its uptrend in the first quarter, but has begun to show signs of moderation since the start of the second quarter.
However, CardinalStone sees an inflation downtrend that started in April to continue through the second half of the year, closing at 15.3% with an overall average of 17.2% for 2021 compared to 13.2% in 2020.
Analysts explained that the projected moderation possibly relates to the high base effect of the previous year, propelled by structural elements that are unlikely to repeat.
To this point, while there remains the likelihood of further PMS price hikes as oil prices stay elevated and the subsidy burden bites, it is tough to see any price increases that would replicate those of 2020 as political will, in our view, remains low.
Furthermore, the firm believes that the electricity tariff review, which came into effect in November 2020, is expected to remain static, while FX devaluation could be relatively muted versus 2020.
To the latter point, there is increasing wariness that monetary policy moves could force an appreciation in the parallel market – which appears to have the strongest pull on inflation against the NAFEX window.
Analysts see an upside risk emerging from food inflation, adding that insecurity remains a bane to food production in the country.
Going into the third quarter, analysts at ARM Securities expect to see growth numbers come in at a slower pace than seen in the second quarter, an expectation hinged on the absence of a low base like was witnessed in Q2:2021 and a bleak expectation for oil numbers.
The case is worsened by insecurity challenges facing crop producers in the food-producing regions amidst the supply-side challenges in the agricultural sector, ARM added.
But Vetiva Capital see agriculture contributing positively due to the Central Bank intervention in the sector. The firm projects that GDP will expand 4.10% in the third quarter compared with a 3.62% drop recorded in the comparable period in 2020.
Analysts see economic growth of 3.30% in 2021 as against a 1.92% drop recorded in 2020.
However, Vetiva Capital hinted that it remains cautiously optimistic about an oil sector rebound in the third quarter due to operational challenges which could limit growth despite OPEC+ production cut easing and Petroleum Industry Act passage.
Nigeria’s GDP in Recovery Mode, Analysts See 3.1% Growth
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