Decline in Economic Growth for  Two Quarters Raises Concerns

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The news that Nigeria’s economy expanded for the fifth consecutive time after exiting a recession, with the GDP growing at 1.50 per cent in the second quarter, should ordinarily have bolstered the hope for a better economy,  but analysts pointed  out that the decline  in the growth rate for two consecutive quarters is worrisome. Kunle Aderinokun and Bamidele Famoofo report

Though the economy of emerged from recession more than a year ago, with Gross Domestic Product (GDP) still in the positive territory, the reality on ground is that growth has assumed a declining trend since end of fourth quarter (Q4) 2017.

A drop in growth was first seen in first quarter (Q1) 2018 when the GDP growth fell to 1.95 per cent  from 2.1 per cent, which closed  the fiscal year 2017. Again, the National Bureau of Statistics has revealed that rather than the economy expanding, it shrank to 1.5 per cent from 1.95 per cent of Q1 2018.

“This has established a negative downward trajectory for economic growth as real GDP quarter on quarter recorded a negative growth rate of -13.2 per cent,” CEO, The CFG Advisory Ltd, Adetilewa Adebajo, pointed out in while reacting to the report on GDP performance in Q2 2018 recently published by NBS.

Adebajo observed that growth has stalled and the economic growth since coming out of recession has not come close to the three per cent (3 per cent) rate of population growth. “This has won Nigeria the global poverty capital title and in the process we have lost about US$200 billion from our GDP from a high of US$570 billion, it currently stands at US$370 billion.”

The decline in economic growth as presented by the NBS did not come as a surprise to Dr. Boniface Chizea, a Lagos-based Economist, but was worrisome. “The economy growth of 1.5 per cent year-on-year last month representing a drop from 1.9 per cent in June is worrisome but not surprising.”

According to Chizea, the level of economic growth at 1.5 percent is below the notional assumed growth in population of 3 per cent. “It is indicative of the fact that the misery index in the land would worsen even as unemployment has been currently estimated at worrisome 18.8 percent. We have in the past experienced growth in GDP that averaged 6-7 per cent. But for perceptive observers of the economy, the falling rate of GDP did not come as a surprise,” he added.

Growth Inhibitors

“The slowdown in Nigeria’s year-on-year (YoY) growth to 1.5 per cent in second quarter in 2018, from 2.0 percent in first quarter in 2018, was partly due to a 4.0 percent contraction in the oil sector, which masked stronger non-oil sector growth. It is notable that the biggest non-oil sectors – crop production, wholesale and retail trade and manufacturing – underperformed,” Economist and Head of Research, Sub-Saharan Africa, Renaissance Capital, Yvonne Mhango , revealed in a report by  Renaissance Capital on the recently published GDP data for Q2.

To Adebajo,  the reasons for stalled growth in Nigeria’s economy were a manifestation of the lack of stimulus due to tight monetary policy. He frowned on the banking sector not lending to sectors that will drive the economy despite good liquidity.  Other reasons, which the economist advanced for the declining growth included poor fiscal and deficit management, huge debt servicing, poor budget implementation, security concerns, low purchasing power and consumer demand.

“The uncertainty the forthcoming elections bring is also not helpful, as most investors local and foreign are already taking a flight to safety”, Adebajo noted.

Chizea blamed the dwindling performance of the economy to the lacklustre attitude of political office holders to the implementation of the National budget while all attention is focused on the elections.

“The reason for this development is not farfetched as political infighting has diverted attention from the economy which to all intents has now been relegated to the background. No one now talks about budget 2018, which was presented to the National Assembly on November 7, 2017 and still in the doldrums with hardly any attention being paid to it. Any talk in this respect is focused on the budget for elections, which was surprisingly not included in budget 2018 estimates,” he lamented.

Chizea warned that no material economic growth will be achieved in 2018, if the managers of the nation’s economy do not implement the vote for capital expenditure in the budget. “And the scary situation might worsen as election related liquidity flows into the economy with the potential of increasing the rate of inflation which worsens the situation of the down trodden.” He regretted that the Economic Recovery and Growth Plan (ERGP), which is the economic blueprint of the federal government is being jettisoned for re-election ambitions. “The ERGP for which recently we witnessed some activities by way of the constitution of focus labs is now hardly on the radar of activities in the economy.”

Agriculture

According to Afrinvest Research, the slowdown in agriculture deepened in Q2 2018, as the sector expanded 1.2 per cent y-o-y, its slowest pace on record, based on quarterly data from 2010. The decline was on the heels of sharp moderation in two sub-sectors, crop production and livestock, suspected to be linked to recent restiveness prominent around North-central Nigeria.  In recent times, insecurity due to herdsmen-farmer clashes has continued unabated in the middle-belt region, thus affecting crop and livestock outputs. Hence, growth in crop production (89.1 per cent of total real agriculture GDP) slowed to 1.4 per cent y-o-y in Q2 2018 from 3.4 per cent y-o-y in the previous quarter, the lowest on record, while the livestock sub-sector (7.5 per cent of total real agriculture GDP)  remained in the negative territory, plunging deeper at -2.0 percent y-o-y, the weakest performance since Q4 2012.

“The current trend in agriculture is worrying, as growth remains weaker than long-term trend of c.5.0 per cent despite the federal government’s substantial support to the sector, most especially through the Central Bank of Nigeria (CBN’s) Anchor Borrowers’ Programme. We believe the ambitious plans for food security and import substitution will take a while to yield results. This is because the current intervention in agriculture is inadequate to drive desired growth, given unaddressed factors such as the huge productivity gap in agriculture, climate change impacts in the form of drought, parasites & diseases and a potential reduction in youth participation in agriculture as massive urbanisation and rural-urban migration intensifies.”

Afrinvest, however, warned that without effective strategies to lessen the impact of the downside risk factors, performance in agriculture will remain weak in the long-term.

Manufacturing

According to Afrinvest Research, the trend in the growth of the manufacturing sector remains volatile, as growth moderated to 0.7 per cent y-o-y in Q2 2018, from 3.4 per cent y-o-y in the preceding quarter.

This, the Renaissance Capital  pointed out, was driven by tepid growth in sub-sectors such as cement (+3.8 per cent) and food, beverage & tobacco (+1.2 per cent) which recorded slower paces of growth, but cumulatively account for 54.6 per cent of total manufacturing real GDP. Notwithstanding, the impressive growth performance of the textile, apparel and footwear sub-sector – which accelerated at 2.7 per cent (the highest post-economic recession) – accounting for 22.1 per cent of total manufacturing real GDP, cushioned the effect.

“In our view, given the ease in FX challenges that affected the manufacturing sector’s growth between 2016 and early 2017, the slow momentum in the sector may be due to sluggish recovery in consumer spending.”

Services

After persisting in the negative territory for much of 2016 and 2017, the services sector staged a strong rebound in Q2 2018, growing at 2.1 per cent y-o-y, the highest since Q4 2015. This performance reflected a broad-based improvement in the largest sub-sectors as information and communications rose sharply (11.8 per cent y-o-y) and construction posted a positive and strong recovery (7.7 per cent y-o-y). Furthermore, trade and real estate services, which both account for 39.4 percent of services GDP, recorded strong recoveries, although both are still some way off positive territory.

“We believe the resurgence in services was only a matter of time, given the pressure it came under during the slowdown as it recorded seven quarters of negative growth since Q2 2016. Despite the strong showing, we believe much needs to be done to annex the inherent growth potentials in the sector. There has been skewed focus on the agriculture sector of the economy which currently accounts for 22.9 per cent of GDP; whereas, the services sector, most especially trade, has received less attention in terms of access to cheaper credit.”

“Our thesis presupposes that focus on the services sector, accounting for 54.4 per cent of total real GDP, has the potential to help achieve sizeable mileage in re-aligning growth around long-term trend.    

Outlook

Adebajo noted that the key to a turnaround in Q3 was proper capital budget implementation and timely passage of the 2019 budget. “The electoral spending by government of N200 billion supplemented by the political parties might just be the saving grace to provide some stimulus to restore economic growth.”

Chizea is of the opinion that Nigeria won’t be able to achieve the 2.1 per cent projected growth the International Monetary Fund (IMF) for 2018.  “The reality that stares us boldly on the face is that even this less than impressive rate of projected growth is certainly not going to be achieved in the context of contemporary developments of declining growth rates”, he said.

“We must find the capacity as a nation not to forget the economy on the altar of self-serving pursuits of political interests by the movers and shakers of the Nigeria economy. And we must not ignore the rueful consequences of this situation as it breeds rabid antisocial tendencies and behaviours which could get out of hand to the chagrin of all concerned,” he advised.

Meanwhile, Renaissance Capital said it was still optimistic that Nigeria will achieve a 2.1 per cent growth in 2018. “We retain our growth projections of 2.1 per cent y-o-y in FY 2018, below population growth rate of 2.6 per cent and long-term trend of 6 – 7.0 percent.”  

But to achieve the projection, it said, there was a need for a sustained performance in non-oil output and a recovery in the oil sector. “We believe the non-oil sector will receive a boost from budget releases for capital expenditure and election spending. Also, the recovery in the oil sector is within reach if production numbers pick up, as the price of crude has continued to trend above US$70.00/barrel.”