Plethora of Weak Indicators Confirm Frail Economic Performance

The anticipatory wait for the release of reports on the various macroeconomic indicators - indicative of the performance of the economy - was finally quelled by the National Bureau of Statistics (NBS) on the 31st of August 2016. In line with expectation, economic output declined for the second consecutive quarter as GDP contracted further by 2.1% Y-o-Y in Q2:2016 from 0.4% in Q1:2016, thus confirming the economy to be in a recession. The performance for the period was dragged by activities in both the oil and non-oil GDP which contracted 17.5% and 0.4% Y-o-Y respectively.

The significant contraction recorded in Oil GDP (-17.5% Y-o-Y) was broadly driven by lower oil production numbers in Q2:2016, settling at 1.7mb/d from 2.1mb/d in both Q1:2016 and Q2:2015. The decline in oil production was expected given the spate of attacks on oil installations by militants in the Niger Delta region. Similarly, non-oil GDP contracted for the second consecutive quarter, down   -0.4% in Q2:2016 from -0.2% in the preceding quarter. Of 26 sub-sectors which make up the non-oil GDP, only 7 recorded positive growths in Q2:2016, while 19 contracted. In terms of contribution to total GDP, the non-oil GDP accounted for 91.7% of total GDP while oil GDP represented 8.3%.

By sector, services remains the major contributor to GDP post-rebasing, accounting for 54.8% of total GDP while Agriculture and Industry represented 22.7% and 22.6% respectively. The Services sector which was the major buffer to GDP growth in 2015, contracted 1.3% as challenges relating to foreign exchange pressured performance during the period. Similarly, the Industrial sector contracted for the sixth consecutive quarter, shrinking by 9.5% in Q2:2016 as constrained output in the Oil & Gas and Manufacturing industries continued to pressure growth in the sector. On the flipside, the Agricultural sector remains the only bright spot in the economy, expanding 4.5% Y-o-Y in Q2:2016.

Outlook on Growth
The performance of the economy in Q2:2016 was broadly in line with our projection of -2.0% for the period and we remain less optimistic on the performance of the economy for 2016. As FX related challenges linger, we expect this to weigh on economic performance especially in the manufacturing sector given the heavy dependence on imported raw materials. Our view on the Manufacturing sector is further buttressed by the Manufacturing PMI data which has remained below the 50 point mark in 2016, a leading indicator for weaker manufacturing output. Streamlining to Q3:2016, PMI in July settled at 44.1 and reduced to 42.1 in August; thus, we expect a contraction in manufacturing output by Q3:2016. Against the backdrop of the lingering challenges in the currency market, oil production distortions in the Niger-Delta and uncoordinated policy responses, we expect economic activities to stay negative in Q3:2016. As such, we revise our 2016 GDP projection downwards, from +0.4% to -1.0%.

July Inflation Report
The NBS also released the CPI and Inflation report for July 2016 and akin to our projection of an uptick in inflation rate, headline inflation rate rose from 16.4% in June to 17.1%. Increases were recorded across all COICOP divisions which contribute to the Headline index. The Food sub-index rose 15.8% Y-o-Y in July, 0.5% points higher than 15.3% in the prior month. This was partly due to Imported Food inflation which rose 0.4% points from 20.1% in June to 20.5% in July, reflecting pass-through of lower exchange rate on imported food items. The Core sub-index rose 0.7% points from 16.2% in June to 16.9% in July as higher energy prices - electricity, fuels and lubricants - weighed on the sub-index.

Inflation Outlook
July Inflation numbers were well below our expectation and indeed broader analysts’ consensus. This perhaps indicates domestic prices are yet to reflect the full pass-through of the rapidly depreciating currency. Thus, despite a strong moderation in M-o-M CPI growth in July, we believe Inflation risk will persist and currently assume a base Inflation rate forecast of 19.5% by November 2016 and a bearish scenario of 20.0%. In line with the high inflation rates expectation, we expect further upward repricing of yields in the fixed income market by a minimum 100bps before year-end, as the CBN tightens and investors seek higher yields to compensate for higher inflation