Nigeria’s 1Q GDP decline augurs full-year contraction

The Nigerian economy is at high risk of experiencing its first full-year recession since 1987, after output contracted 0.4% in 1Q from a year earlier. A drop in oil output to a 27-year low and paralysis in other sectors due to fuel and foreign-exchange shortages mean that economic growth is likely to be more sharply negative in the remaining quarters of 2016. While a devaluation of the naira should boost activity over the medium term, it is likely to add to the headwinds for domestic demand growth in the second half.

The economy was expected to deteriorate in 1Q, given its travails, but the drop in oil production was actually less damaging to activity than anticipated, dragging on real GDP growth by only 0.2 percentage point in the period compared with 0.7 percentage point in 4Q and 0.6 percentage point on average in 2015. Oil production of 2.11 million barrels per day for 1Q, as reported by the Nigerian Statistics Office, was at the top end of estimates of 1.8-2.1 million, in a Bloomberg survey and as quoted by the U.S. Department of Energy.

Instead, it was manufacturing that experienced the sharpest drop in activity, falling by 7.0% year over year. This is likely to have been partly connected to a decline in domestic demand but also to the difficulties of importing input materials, due to foreign-exchange controls imposed by the Nigerian authorities last year to defend the naira.

Nigeria

While service-sector growth was positive, it was a mere 0.3% year over year compared with 4.8% in 2015. As a result, services contributed only 0.2 percentage point to headline growth in 1Q compared with 2.7 percentage point in 2015, 4.0 percentage point in 2014 and 4.7 percentage point in 2013. This shows how the dwindling of hydrocarbon revenue since the drop in the price of oil in late 2014 has affected domestic demand. While agriculture was the only sector growing at close to recent trend rates — 3.1% compared with 3.7% in 2015 and 4.3% in 2014 — it appears not to have benefited materially from any import substitution as the cost of overseas foodstuff has risen.

Nigeria

The weak 1Q reading and the likelihood that reduced oil production will constitute a stronger drag on activity in the remaining quarters means that Nigeria faces a high risk of experiencing its first calendar-year economic recession since 1987. A technical recession could come as soon as 2Q. BI Economics’ estimates of quarterly growth, on a seasonally adjusted basis, suggest the economy contracted by 1.5% in 1Q, the first negative reading since 3Q11. Attacks by Niger Delta militants have reduced oil output by 30% this year, bringing it to 1.4 million barrels per day, the lowest in 27 years, according to Oil Minister of State Emmanuel Kachikwu.

A number of foreign oil companies have declared force majeure on shipments from oil terminals so far this year, starting with Shell in February. There is a risk of further attacks, as it is unlikely that the government and the militants will resolve the dispute in the near term. With the fiscal deficit legally capped at 3.0% of GDP, lower oil production will also have a direct impact on how much the government can spend this year — the prolonged delay in passing the 2016 budget until early May has also affected expenditure. Add to this the shortage of fuel and foreign exchange and it is clear that economic growth could be more sharply negative in the remaining quarters of the year.

Nigeria

With Nigeria’s population estimated to be growing by 2.5% annually, living standards are now stagnating, following the drop in oil prices in mid-2014. GDP per capita is likely to slide further as higher black-market rates for foreign-exchange push up inflation, which has prompted a reaction from the Central Bank of Nigeria. The CBN held its policy rate at 12% on May 24, but Governor Godwin Emefiele said it was time to introduce greater flexibility in the management of the foreign-exchange market. With President Muhammadu Buhari still appearing opposed to a devaluation, it remains to be seen to what extent capital controls will be relaxed and the market allowed to determine the value of the naira.

A weaker currency would undoubtedly weigh on domestic demand and growth in the near term but should spur foreign investment and increase the competitiveness of domestically produced goods. The latest Bloomberg survey was published before the 1Q GDP data were released, and the weakness of growth means the expectations of a 2.5% expansion for 2016 will probably be disappointed. This poor start to the year could lay the ground for a rebound exceeding the 3.5% expansion projected for 2017. That would depend on the unrest in the Niger delta being resolved, either politically or militarily, and a shift toward more market-based economic policy by the Buhari administration.