Q2 2020 GDP Report: Covid-19 restrictions and OPEC+ compliance force a contraction, but a short-lived recession on the cards

The Nigerian Bureau of Statistics released its Q2 2020 report which in line with the pattern across most economies showed a covid-19 induced contraction of 6.1%. This print looks less worse that the large declines observed across many developed countries which, in my view, is testament to the less strict nature of compliance with covid-19 movement restrictions across many parts of Nigeria as well as some support from strong growth in the telecommunications and financial sector. Looking ahead, Nigeria appears set to enter into a technical recession in Q3 2020 (with a contraction in the region of 2-2.5% y/y), which will remain in place at least over Q4 2020 resulting in a contraction of 1.8-2% y/y in 2020 real GDP.  However, as OPEC+ output curbs fall away, and economic activities return to the path of normalcy (with or without a vaccine), Nigeria will likely exit recession in Q2 2021.  

Compliance with OPEC+ cuts weigh on oil GDP growth, with some base period revisions: In the aftermath of the slump in crude oil prices in April 2020, which saw Nigeria’s benchmark grade plunge to as low as USD14/bbl from an average of USD40/bbl in Q1 2020, the Nigerian oil ministry moved to coordinate a reduction in export volume in line with the historic OPEC+ agreement signed in April 2020. Under the landmark cuts, Nigeria was required to lower crude oil sales (exclusive of condensates) to 1.44mbpd and the NBS report indicates that average oil output for the second quarter printed at 1.81mbpd (down 10 percent y/y). Official numbers for April and May 2020 from NNPC place total oil production at 2.04mbpd and 1.75mbpd which implies that oil production averaged 1.65mbpd in June 2020 for the average to come in at 1.81mbpd. This implies that forced compliance with OPEC+ cuts were largely responsible for the recession in oil output. As these disruptions were voluntary (not the result of militancy) Nigeria has some spare capacity in oil production and as the OPEC quotas fall off in 2021, there is robust case for strong rebound in oil GDP growth next year.

Figure 1: Nigeria: Trends in average oil production and price per quarter

Source: NBS, CBN

Covid-19 restrictions blight non-oil output: On the non-oil side, output fell in response to the lockdown restrictions with the aerial blockade, the ban on inter-state travel and movement restrictions hurt trade (-17% y/y) and transportation (-49% y/y). The limits on movement imposed across key states at the epicentre of Nigeria’s covid-19 outbreak hurt manufacturing (down 8%), construction activity (-32% y/y) and real estate (down 22% y/y). the contraction in the manufacturing sector is consistent with PMI readings showing a drop below 50 over the second quarter. However, as the lockdowns forced activity online, telecoms expanded 18% y/y as Nigeria’s telecom providers added 8million lines (total 196million) while data service subscribes rose 17% y/y to 140million. In a similar vein, the banking sector growth remained high – largely reflecting positive base effects from the LDR driven expansion observed in Q4 2019. Agriculture also expanded as movement restrictions were lightly implemented across Nigeria’s rural areas over the period.

Figure 2: Nigeria: Disaggregation of non-oil GDP growth

Source: NBS, CBN

Figure 3: Telecommunications GDP and Subscriber growth

Source: NCC, NBS

Figure 4: Manufacturing PMI and Manufacturing GDP

Source: CBN, NBS

The only way is up via the technical recession route

Over the rest of the year, the removal of restrictions suggests the scale of output contractions should moderate as economic activities recover. For telecoms, growth likely flatlines in H2 2020 as base effects mute the scale of gains while financial services growth will expand strongly in Q3 before flat lining in Q4 2020. We expect trade and construction to remain mired in negative territory but see agriculture remaining in growth over the rest of the year. On oil side of things, the outlook over the rest of 2020 is for contraction as Nigeria is forced to comply with OPEC+ output quotas which will keep overall oil production at 1.8-1.85mbpd over H2 2020, well below the average 2.04mbpd recorded in H2 2019. Overall, Q3 2020 GDP is likely to fall in the range of contraction between negative 2-2.5% with full year GDP growth now likely to a contraction in the region of negative 1.8-2% y/y. 

Figure 5: Nigeria: Oil and Non-oil GDP Growth

Source: NBS, Authors computation


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: