With Positive Q2 GDP Data, Improving Business and Political Climates Necessary for Strong Growth

While still basking in the euphoria of positive GDP growth, achieved in the second quarter, the federal government has been tasked to work harder to sustain the trajectory and translate the figures to tangible economic benefits for ordinary Nigerians, reports Kunle Aderinokun

After a protracted crisis, the Nigerian economy mustered its first growth in the second quarter. The economy, as reported by the National Bureau of Statistics, at the end of the quarter, emerged out of recession, which it entered in the second quarter of 2016, having moved to the positive territory of growth, exactly a year after. According to NBS, the gross domestic product (GDP) in Q2 2017 grew by 0.55 per cent (year-on-year) in real terms, showing an increase of 2.04 per cent over the rate recorded in the corresponding quarter of 2016 ( –1.49 per cent). The growth was also higher by 1.46 per cent points from rate recorded in the preceding quarter, (revised to –0.91 per cent from –0.52 per cent). Quarter on quarter, real GDP growth was 3.23 per cent.

BREAKDOWN
Accounting for a significant boost to the GDP growth was the oil and gas sector, which the statistics agency pointed out, grew by 1.6 per cent year on year in Q2 2017 compared to the -11.6 per cent year on year of the corresponding quarter in 2016. The relative peace and stability in the oil-rich Niger Delta over a period of time provided the requisite fillip for oil production, in particular and the economy, in general.

During the review quarter, oil production was estimated to have averaged 1.84 million barrels per day (mbpd), which was 0.15 million barrels higher than the daily average production recorded in Q1 2017. Oil production during the quarter was higher by 0.03 million barrels per day relative to the corresponding quarter in 2016, which recorded an output of 1.81 mbpd.

Besides, the non-oil sector, which in real terms, represented 91.11 per cent share of the GDP, grew by 0.45 per cent in the review quarter, which was 0.83 per cent higher than the rate recorded in the corresponding quarter in 2016 and -0.28 per cent point lower than in the first quarter.

The major drivers of growth in the non-oil sector were agriculture, finance & insurance, electricity, gas, steam and air conditioning supply and other services. Agriculture showed strong trend of growth, increasing by 3.01 per cent in Q2 2017, from 3.39 per cent in Q1 2017 and 4.53 per cent in Q2 2016.
Likewise, manufacturing maintained its positive growth for the second consecutive quarter in Q2 2017, growing at 0.64 per cent compared to 1.36 per cent in Q1 2017 and -3.36 per cent in Q2 2016. While trade which has a dominant share of GDP remained negative at -1.62 per cent, the contraction in the sector decelerated from the -3.08 per cent recorded in Q1 2017.

Besides, electricity, gas, steam and air conditioning supply, and financial institutions sectors also recorded strong growths, with electricity, gas, steam and air conditioning growing by 35.5 per cent in real terms, compared to -5.04 per cent in Q1 2017 and -10.46 per cent in Q2 2016 and financial institutions growing by 11.78 per cent in Q2 2017, compared to 0.60 per cent in Q1 2017 and -13.24 per cent in Q2 2016.
The results also showed that the industry sector grew positively by 1.45 per cent in Q2 2017, after nine consecutive quarters of negative growth since Q4 2014.

When measured as a percentage of GDP, services retained the bulk of the GDP at 53.73 per cent in Q2 2017, down by 1.94 per cent points (55.67 per cent) from the first quarter of 2017 and 54.80 per cent in Q2 2016. Industries accounted for 23.31 per cent of GDP, compared to 22.90 recorded in Q1 2017 and 22.65 per cent in Q1 2016 while agriculture accounted for 22.97 per cent of GDP in the quarter under review, compared to 21.43 per cent in Q1 2017 and 22.55 per cent in Q2 2016.

BEYOND EXPECTATION
For the 12 months that the economy was in the woods, several projections, estimations and postulations were made by experts on the fate of the economy. While most of them had predicted that Nigeria would finish the year with a positive GDP growth rate, the economy exited recession faster than they had calculated.

For instance, both the International Monetary Fund and the Economist Intelligence Unit had projected that the economy would grow by 0.8 per cent by the end this year. But the CBN had also forecast that the economy would exit recession in the third quarter of this year.
Indications that the economy would exit recession faster than envisaged were, however, rife with the improved capital importation figures for Q2 2017 released by NBS.

CAUTIOUS OPTIMISM
The news of the economy emerging from recession was greeted with cautious optimism by the federal government. The government was concerned that despite the positive feat recorded, the growth remained fragile and vulnerable.
The Economic Adviser to the President, Dr. Yemi Dipeolu, cautioned that the economy remained vulnerable to “exogenous shocks or policy slippages.”

Dipeolu, who said the end of the recession was welcome, reasoned nonetheless that it was imperative to intensify the implementation of the Economic Recovery and Growth Plan (ERGP) as well as diversification of the economy to achieve the desired results.

According to him, “Overall, the end of the recession is welcome but economic growth remains fragile and vulnerable to exogenous shocks or policy slippages. Accordingly, it remains essential to intensify efforts going forward on the implementation of the ERGP to achieve desired outcomes including sustained inclusive growth, further diversification of the economy, the creation of jobs and improved business conditions.”
Dipeolu, who stated that the GDP figures gave cause for “cautious optimism” in the face of falling inflation, pointed out that unemployment and food inflation have remained high as a result of the cost of transportation and what he described as seasonal factors.

“The GDP figures give grounds for cautious optimism, especially as inflation has continued to fall from 18.72 per cent in January 2017 to 16.05 per cent in July 2017.
“Foreign exchange reserves have similarly improved from a low of $24.53 in September 2016 to about $31 billion in August 2017.

“Unemployment, however, remains relatively high, but job creation is expected to improve as businesses and employers increasingly respond more positively to the significantly improving business environment and favourable economic outlook.
“Besides, as key sectoral reforms in both oil and non-oil sectors gain traction, the successful implementation of ERGP initiatives such as N-Power and the social housing scheme will boost job creation.

Amid the caution also came the statement by President Muhammadu Buhari that the real impact of the end of recession would be better felt when ordinary Nigerians experience a meaningful improvement in living standards.
According to the statement by his spokesman, Malam Garba Shehu, Buhari spoke while receiving the President of Niger, Alhaji Mahamadou Issoufou, in Daura, Katsina State.
Shehu noted that Buhari was “very happy” to hear that the country was finally out of the recession, adding that the real gain would be improved living standards for Nigerians.
He quoted the president as saying, “Certainly I should be happy for what it is worth. I am looking forward to ensuring that the ordinary Nigerian feels the impact.”

The statement added that Buhari commended all managers of the economy for their hard work and commitment, observing that more work needed to be done to improve the growth rate.
“Until coming out of recession translates into the meaningful improvement in peoples’ lives, our work cannot be said to be done,” the president was quoted to have said.

NO IMPACT
Following the latest GDP report, analysts have indicated that the figures did not represent or portray the reality on ground as the impact of the economic improvement and emergence from recession had not been felt by ordinary Nigerians.

Offering reasons why the impact of the economic turnaround were yet to be felt, the Statistician General of the Federation, Dr. Yemi Kale, explained that growth in the services sector remained in the negative territory, making it difficult for the citizenry to feel the impact of the slight uptick in economic output.

Kale, who briefed the media in Abuja a day after release of the GDP figures, cautioned that the growth that ended the recession was fragile, calling for concerted efforts to sustain growth in diverse sectors of the economy.
According to him, “To say that there’s no growth because you don’t feel it is incorrect, there is growth. It’s up to the government to create policies to ensure that the benefit of growth is spread across properly.
“The inability to spread it across properly doesn’t mean the growth doesn’t exist. At the time there is a recession, some people are making huge amounts of money, that is the truth.
“The time we were growing at 6 per cent, a majority of the population did not feel it, but those who were feeling it did.

“How many Nigerians entered the Forbes Rich List in the last ten years? Did we have Nigerians in Forbes before? It shows that there’s growth in economic activities, it’s just that there’s a problem with the distribution of the benefits across the country.”

ANALYSTS SPEAK
In their assessment, economic analysts and market watchers have said Nigeria’s movement to the positive territory of economic growth was welcoming, but not yet time to roll out the drums. While stating that it might take a while for the impact of the growth to be felt by Nigerians, the analysts tasked the government to improve the business and political climates with a view to driving accelerated growth.

Managing Director and Chief Economist, Africa, Global Research, Standard Chartered Bank, Razia Khan, stated that, notwithstanding the emergence of the Nigerian economy from recession in Q2 2017 was welcomed, the underlying picture still pointed to weakness.

“An acceleration in growth was almost expected, given the improvement in oil sector performance. However, the slowing of Q2 2017 non-oil GDP is a concern. It means recovery is not necessarily going to happen in a straight line. The pace of reform will be important,” Khan, however, indicated.
Khan added: “The move back into positive territory for Nigerian GDP growth will be welcomed. That said, growth of 0.6per cent y/y does substantially undershoot the consensus estimate. We ourselves had expected stronger growth, not least because of the extremely weak base (-2.06per cent y/y). While improved oil production has driven some of the recovery, the output numbers provided by NBS (1.84mn bpd) suggest that further upside from this source might be limited.”

“We also need to take into account that the revised estimate for Q1 GDP growth had an even sharper contraction in GDP at the start of the year (0.91per cent y/y from -0.52per cent previously). So while many will focus on the headline move back into positive territory, some of that optimism must necessarily be tempered. This is not at all a robust GDP print. It still falls far short of the growth rates the Nigerian economy should be achieving,” the chief economist pointed out.

Khan therefore expressed the optimism that, “an improved FX backdrop will see further acceleration in the non-oil GDP performance over the coming months. Improved execution of the capital expenditure budget should also help.”
Also, Director, Union Capital, Egie Akpata, said the confirmation of the economy exiting recession was largely expected, pointing out that, “This expectation has probably been priced into the equities market.”

Akpata, who posited that, ”The NBS confirmation that we are out of recession is a good psychological boost to the confidence of investors and key players in the economy,” however, lamented that, “The immediate impact to the common man might not be felt for a few months as it will take a while for increased confidence to be translated to increased wages or job opportunities.”

According to him, “A GDP growth rate of 0.55per cent compared to a population growth rate of 3per cent implies reducing per capita income for Nigerians. Coupled with 16per cent inflation and astronomical interest rates, it is clear that the consumer is likely to be under pressure for a while.”

The CBN, Akpata believed, “will now be under increased pressure to do something about interest rates which are effectively 22.6per cent risk free.” “Clearly, productive investments cannot happen in a system where government paper is the most profitable investment around. How the CBN manages interest rate reductions without a negative impact on the current stable exchange rate is open to debate.”

For the CEO, National Competitiveness Council of Nigeria (NCCN), Matthias Chika Mordi, it was a positive development for capital providers. He, however, cautioned that, “the GDP growth was tenuous,” pointing out that, “a revision of Q3 figures down the line might reveal a slight contraction.”

Mordi noted that, “Of deep concern is the actual reduction in average income. Year-on-year population growth is 2 percentage points above the GDP growth which means average income for Nigerians declined 2 per cent in Q3.”
According to him, “It will take consistent growth in excess of 7 per cent for 19 years to return Nigerians to the average income they had in 2015.”

He, therefore, pointed out that, “The challenge for policy makers is to provide an improved environment for accelerated growth. The takeaway is that better business and political climates positively impact GDP.”
In his view, CEO, Global Analytics Consulting Ltd, Tope Fasua, maintained that, “the recession was unnecessary in the first place, and what caused and deepened it was not anything cyclical.”
“Economists should not create excuses for themselves. Even the prices of crude oil should not be so consequential to the economy if we were serious and were not in the business of self-protection. We should think for the collective. The recession was caused by the mismanagement of the Naira. There was a time the government decided it would stop providing for some legitimate transactions and that people should go sort themselves out. Of course people did. And the market was chaotic.

“While we stopped funding foreign education (even for those studying online), and health tourism, our government officials did just that with public money, thereby eroding credibility from the system. Since these spendings are emotive, we know what happened. Naira fell to N540 to the Dollar and that had immediate impact everywhere in our import-dependent economy. Workers lost jobs, banks, telecoms, manufacturing, services, all shed workers. Companies closed down outrightly. And those who remained afloat adjusted prices upwards, sometimes by 100per cent! Especially food and other basics. There was shut-in of productivity all over the economy,” he recalled.
Fasua advised government to learn to “be fair and never be that lethargic” towards what the people want. Besides, he added that, “We should also save the celebration for now and work harder to reposition the economy instead.

“Finally we should move ahead of GDP; it is a weak and inefficient measure of economic performance. There are better measures if we are really serious, which will help us measure what matters – like access to education and health, food poverty, longevity, and the critical issues. It’s galling that our economic managers keep ignoring these issues,” he suggested.

GOING FORWARD
Realising that the dynamics in the economy have changed, some analysts have revised their projections.
Analysts at Renaissance Capital noted: ”We are revising our 2017 GDP growth forecast up, to 0.7per cent vs 0.5per cent previously, owing to a more favourable outlook for oil output.

They, however, believed “the non-oil sector’s recovery will be constrained by sluggish demand, which is reflected in YoY credit growth of -0.1per cent in July, vs 19.9per cent a year earlier (Figure 5). The downside risk to our growth outlook is a resumption in attacks on oil facilities that results in output falling.”
Analysing the Q2 2017 GDP data, the Renaissance Capital posited: “Nigeria grew 0.5per cent YoY in 2Q17 vs -1.5per cent YoY a year earlier. The oil & gas and financial services sectors pulled the economy out of recession. Outside agriculture, the non-oil sector remains weak. This is mainly because real estate and trade, which account for 25per cent of GDP, are still in recession. Owing to a more favourable outlook for oil output, we revise our 2017 growth forecast up, to 0.7per cent vs 0.5per cent previously. However, sluggish demand leads us to believe the recovery will be pedestrian.

“Nigeria’s oil & gas sector grew in 2Q17, after contracting for six quarters. The extractive sector grew 1.6per cent YoY vs -11.6per cent YoY a year earlier, on the back of an increase in oil production to an average of 1.9mn b/d, vs 1.8mn b/d over the same period (Figure 4). We think the repair of the Trans-Forcados pipeline, which led to output of c. 200k b/d coming back on stream in June, and the tripling of the budget for the amnesty programme for Niger Delta militants, partly explain the improvement in oil output. We think it is too early to say whether the oil sector’s return to growth is the start of a trend; the last time the oil sector grew for longer than a quarter was in 2011.

“The non-oil sector grew by a modest 1.1per cent YoY in 2Q17, compared with -0.4per cent YoY a year earlier. The sector continues to be weighed down by the underperforming services sector. Agriculture is the staple contributor to GDP growth, due to its size (23per cent of GDP) and consistent 3-4per cent growth. Manufacturing’s moderate recovery in 2017, following almost two years of decline, has been led by food and beverages. The sub-sector grew by 2.7per cent YoY in 2Q17 vs -5.5per cent YoY a year earlier. We believe the improvement in FX liquidity has contributed to the pick-up in activity in the manufacturing sector. Textiles has also shown modest growth YtD after declining for most of 2016. However, the cement sector continues to underperform; it declined by 4.2per cent YoY in 2Q17, vs a contraction of 5.5per cent YoY a year earlier.

“Finance is the outlier from the services sector; it grew 11.8per cent YoY in 2Q17, vs a decline of 13.2per cent a year earlier. This made it the second-biggest contributor to GDP growth in 2Q17. This we partly attribute to banks investing in high-yielding government securities, which is profitable on a risk-adjusted basis. Finance’s performance was not strong enough to counter the decline in trade and real estate. Trade (a good gauge for the consumer – see Figure 3) contracted by 1.6per cent YoY in 2Q17 vs zero growth in 2Q16. The real estate sector declined by a slower rate of 3.5per cent YoY vs 5.3per cent YoY over the same period. On the upside, public administration – the government – grew for the first time since 4Q14, when the oil price collapsed.”

Similarly, analysts at FBN Capital, an arm of FBN Holdings Plc, stated: “Turning to the Q3 2017 data, we see positive base effects: Q3 2016 was the low point in the recession of five quarters and saw particularly low oil output of 1.61 mbpd, at least according to the latest revised figures. We are looking for GDP growth of at least 1.3per cent y/y in the current quarter.”

Reviewing the latest GDP data, they stated: “The NBS has released the national accounts for Q2 2017 to show an end to the recession with growth of 0.6per cent y/y (after a downward revision to -0.9per cent for the previous quarter). Our expectation was GDP growth of 1.6per cent y/y in Q2 on the basis of some recovery in both the oil and the non-oil economies. That for oil did materialize but the data for the non-oil economy gave mixed signals. These include a contraction in telecommunications and information, and growth in public administration, which were both firsts for at least two years.

“The GDP data for Q1 was adjusted because oil output has been revised downwards from 1.83 mbpd to 1.69 mbpd. Just three months ago, the NBS lowered its output figures for the four quarters of 2016. Any criticism should be levelled not at the bureau but at the failure of the authorities to produce a single trusted data series for oil output. We do not think this is too demanding a task.

“Oil’s share of real GDP amounted to 8.9per cent in Q2 2017 and is now only the fifth largest in the economy: it is topped in descending order by agriculture, trade, information and communications, and manufacturing. Through its linkages across other sectors, however, the indirect oil economy may be as large as 40per cent of GDP.
“The expenditure-based GDP series only runs to Q3 2016. Listed company reports and anecdotal evidence, however, point to still soft household demand.”