Nigeria’s Exit From Recession Expected To Be Sustained In Q3

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(Sundiata Post) – The service sector, which is the largest contributor to economic activity in Nigeria remains stuck in recession despite the country’s narrow exit. Analysts are however positive that the marginal economic growth recorded in the second quarter will be sustained in the third and last quarters of the year, to deliver an overall positive growth for the economy.

The optimism for a sustained positive growth in the third quarter is hinged on the positive Purchasing Manager Indicators (PMI) for both July and August, released by the Central Bank of Nigeria (CBN) and FBN Quest, which shows that economic activity in both the manufacturing and non-manufacturing sector remain upbeat.

Manufacturing and Non-Manufacturing PMI stood at 53.6 and 54.1 points respectively, for the month of August, according to a publication by the CBN last week.

“At 53.6 index points, Manufacturing PMI has sustained five straight months of expansion, with 12 of the 16 sub-sectors reporting strong growth in August. All six sub-indices also sustained uptrend with Supplier Delivery Time (52pts) and Inventories (54.9pts) reporting faster growth, while Production Level (57.4pts), New Orders (52.3pts) and Employment Level (51.5) growing at a slower rate.

“ Similarly, Non-Manufacturing PMI (54.1pts) indicated expansion in Non-manufacturing activities for the fourth consecutive month, with performance in 15 of the 18 sub-sectors further strengthening in August. Employment Level (54.4pts) and Inventories (52.3pts) sub-indices grew at a faster rate, while Business Activity (56.1pts) and New Orders (53.5pts) slowed,” stated analysts at United Capital, in an investment note sent out on September 9.

“Juxtaposing the August PMI reading with GDP growth, available data provides evidence that above 50pts PMI is consistent with positive GDP and vice versa. Accordingly, sustained expansion in PMI reading foreshadows another positive GDP growth in third quarter 2017 with September being the only month left in the quarter,” the analysts at United Capital concluded.

In a different note published by auditing and consulting firm, Pwc, on the same day, they forecast a GDP growth rate of 1.8 percent in the third quarter of 2017 and 1.1 percent in the fourth quarter, which will deliver an overall positive growth of 0.7 percent for the year.

Explaining the rational for their forecast, Pwc noted that the projected growth is plausible, “given our expectation of a strong harvest season and sustained foreign exchange liquidity, which should support a broad based economic recovery.” However, it noted that risks to its forecast include “ a decline in oil prices and production, and policy disruptions which could hamper investment flows to the economy.”

Pwc also noted that it expects a sustained economic growth, quoting a study by Terrones et al (2009) “which examined a sample of 122 business circles in 21 advanced economies, discovering that an oil induced recession, on average, lasts for about four quarters. After the economy bottoms, it could take a year for real GDP to recover to pre-recession levels.

Pwc therefore noted that it “expects real GDP to attain full recovery by 2019, with growth moving closer to its long term trend of 6.7 per cent,” which would depend on the “structure of the economy and reforms implemented.”

The optimism for sustained economic growth is despite the figures from the NBS showing that economic activity in the services sector, which is the single largest contributor to the Gross Domestic Product (GDP) accounting for 53.73 per cent of all economic activity, as of the second quarter of 2017 and an average of 54 per cent in the last five years, remains stuck in recession.

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The sector contracted 0.85 per cent (year-on-year) in the second quarter, despite overall economic growth of 0.55 per cent. This is sixth straight quarter of contraction recorded by the service sector since the second quarter of 2016-when it slowed 1.25 per cent, according to data compiled by BusinessDay and sourced from the second quarter NBS report.

The service sector was dragged down by a sizeable contraction in the telecommunication sector, which shrank -2.9 per cent and trade, which also contracted by -1.62 per cent.
The contraction in the service sector underlies the fragility of the country’s economic recovery, beyond an increase in oil output, according to Mark Bohlund, the senior economist for Africa and the Middle East, at Bloomberg Intelligence.

“A sharp decline in telecoms output explains a large part of the weakness in service-sector growth. This should ease in the second half of the year, while higher oil revenue may help the construction and real estate sectors to recover,” Bohlund said by email.

The telecom sector has had to weather the storm of a deteriorating economy, weaker naira exchange rate and falling consumer purchasing power.

Etisalat Nigeria, which serves some 20 million subscribers, missed payments for a $1.2 billion syndicated loan, which led creditor banks to take over and they now await a new buyer for the rebranded Etisalat that now goes by the name “9mobile.”

Growth in the two other sectors that make the most contribution to Nigeria’s economy, helped the country’s exit from recession. The two other sectors with the most contribution to Nigeria’s GDP are Industry (23.31 per cent) and Agriculture (22.97 per cent).
Industry grew 1.45 per cent in the second quarter, ending six quarters of contraction, while Agriculture, which has managed a positive growth while the recession lasted, rose 3.01 per cent, though it is lower than the 3.39 growth recorded the previous quarter.
The relatively slower growth in agriculture was mainly due to crop production sub-sector (88.9 per cent of agriculture GDP) which grew by 3.21 per cent second quarter 2017 versus 3.50 per cent in first quarter of 2017.
Excluding oil, Industry got a boost from manufacturing, which climbed 0.6 per cent, lifted by improved foreign exchange liquidity.
Hammered by declining oil prices and reduced output- brought on by militant attacks on energy facilities in the oil-rich Delta, as well as acute dollar shortages which harmed businesses, the Nigerian economy declined -1.6 per cent last year, the first such drop since 1991.
The economy has however turned the corner in second quarter of 2017, following an expansion in the oil sector (+1.64 per cent) the first growth in two years, and is tipped by the International Monetary Fund to grow 0.8 per cent this year.

The 0.55 per cent growth in second quarter is however less than the country’s population growth rate of 3 per cent, meaning no growth at all in per capita terms; and compares rather poorly to the sub-Saharan average of 2.1 per cent.
“Although second quarter economic growth of 0.55 percent came in positive, we think it is short of the economy’s potential,” analysts at investment bank Cardinal Stone Partners said in a September 8 note to investors.
“While growth in third quarter and fourth quarter is expected to be higher, on account of stronger oil output and improved foreign exchange availability, we think it would not be as high as seen in pre-2015 due to weak private consumption and investments in the country,” the Lagos-based analysts noted.
The rebound in the oil sector was driven by higher crude oil production during the quarter, reflecting the peace in the Niger Delta.
Crude oil production in second quarter 2016 was hampered due to incessant attacks on oil pipelines and production facilities by militants in the region.
As reported by NBS, oil production volumes rose in second quarter to 1.84 million barrels per day (mbpd), higher than 1.69mbpd and 1.81mbpd in first quarter of 2017 and second quarter of 2016 respectively.
“As peace and dialogue continue between the Federal Government and militants in the Niger Delta, we expect higher crude oil output in the coming quarters.
“The lifting of the force majeure on crude oil exports from Forcados terminal, which occurred in June this year, should also support crude production and raise oil output for third quarter of 2017,” Cardinal Stone added.
President Muhammadu Buhari, who returned to Nigeria August 20 after more than three months of sick leave in London, increased spending to a record N7.4 trillion ($20.6 billion) this year.
The budget is part of a wider plan to increase the economic growth rate to seven percent and create 15 million jobs by 2020 by pumping more crude and increasing infrastructure spending.
The spending plan has a N2.36 trillion deficit, but underperforming oil and non-oil revenues have stoked the deficit and forced government to borrow at a frantic pace, with fears that the deficit based on the current trend may be exceeded by the end of the year.
Lower than expected oil and non-oil revenues saw the Federal Government’s fiscal deficit rise sharply by 101 percent to a nine-year high of N1.1 trillion in the first quarter of 2017, according to data compiled by BusinessDay.
That is two times the size of a prorate estimate of N575 billion and at such pace, could swell further to N4 trillion by year-end.
Udoma Udo-Udoma, minister of budget and national planning, told reporters last month that the option to “adjust spending” was on the table, as government considers alternatives to curtail its biggest fiscal deficit in nine years.
“We may look at adjusting some of our expenditure projections downwards, instead of resorting to extra borrowing,” Udoma said.
“Given the need to stimulate the economy by spending on capital projects, the best option, however, will be to boost our revenues especially by improving our tax take,” Udoma added.

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