Q2 2019 GDP: Broad-based Moderation in the Non-Oil Sector Pulls Economic Growth Lower at 1.9%

The recently released Q2:2019 GDP report revealed that the Nigerian economy expanded at a slower pace of 1.9% Y-o-Y (vs 2.1% in Q1:2019), weaker than Bloomberg’s consensus forecast of 2.5%, due to slow growth in the non-oil sector. The oil sector recovered from its year-long recession, expanding 5.2% Y-o-Y in Q2:2019 (vs -1.5% in Q1:2019). This recovery can be attributed to a weak base as oil production increased 7.6% Y-o-Y to 1.98mbpd but contracted 0.5% Q-o-Q. We highlight that oil sector growth in Q1:2019 was revised to -1.5% from -2.4% due to an upward adjustment in oil production to 1.99mb/d from 1.96mb/d. The trend in oil production in 2019 has been weaker than expected despite our optimism of a stronger performance due to the additional 200,000b/d provided by the recently launched Egina Field. We observe that oil production has been affected by fire outbreaks, force majeures declared by major oil companies, vandalism and the shutdown of export pipelines.

The non-oil sector pulled growth lower in Q2:2019, with a surprising moderation in growth to 1.6% Y-o-Y (vs Q1:2019 2.5%), the weakest since Q1:2018. We attribute the slowdown to a broad-based moderation in major sub-sectors. 

Agriculture Sector Growth Slumps Again
The agriculture sector bucked its recovery trend as growth slowed to 1.8% Y-o-Y in Q2:2019 (vs 3.2% Q1:2019), the second weakest quarterly performance on record. Crop production grew at a slower pace of 1.9% Y-o-Y (vs 3.3% Q1:2019) while the livestock sub-sector contracted 0.01% (vs 0.8% Q1:2019). In our view, the slowdown in the agriculture sector reflects persistent security issues affecting production in Northern Nigeria as well as the resumption of planting activities in the quarter. We believe unresolved insecurity issues would continue to be the biggest risk to the sector in the near term, but we expect improved performance in H2:2019, although this would likely be below the long-term trend of 3.8%.

Weaker Volumes Restrain Manufacturing Sector Growth
Surprisingly, the manufacturing sector contracted 0.1% Y-o-Y in Q2:2019 (vs 0.8%Q1:2019) driven by an underwhelming performance in its major sub-sectors. The cement sub-sector grew slower than in the previous quarter at 1.6% Y-o-Y (vs 2.8% in Q1:2019). Growth in the food, beverage and tobacco sub-sector also softened to 1.2% Y-o-Y (vs 1.8% Q1:2019). Meanwhile, the textile, apparel and footwear sub-sector contracted 1.4% Y-o-Y (vs 1.0% in Q1:2019), the weakest since Q2:2018. The slowdown mirrors the performance of publicly listed manufacturing companies which recorded weak volumes in H1:2019 due to weak consumer spending. Going forward, we expect an improved performance in H2:2019, driven by the seasonal boost to demand and stable exchange rates.

Weakness in Trade and Real Estate Dampen Services Growth
In line with our expectations, the services sector further moderated, growing slowly at 1.9% Y-o-Y in Q2:2019 (vs 2.4% in Q1:2019). The slowdown was widespread across the main sub-sectors, including the ICT sector with a strong growth of 9.0% Y-o-Y rate which was slower than 9.5% in Q1:2019. The telecommunications sector maintained its double-digit growth but slowed to 11.3% Y-o-Y (vs 12.2% Q1:2019).  Conversely, the recovery in the trade and real estate sub-sectors was short-lived as both contracted at 0.3% and 3.8% Y-o-Y respectively (vs 0.9% apiece in Q1:2019). The financial services sector sustained its negative growth but at a slower pace of -2.2%, compared with -7.6% Y-o-Y in the preceding quarter. There was a similar trend in the construction sub-sector, which moderated sharply by 0.7% Y-o-Y in Q1:2019 (vs 3.2% in Q1:2019). We suspect that the partial closure of the Nigeria-Benin border by the FGN due to increased smuggling activities is likely to weigh on services growth in Q3:2019.

Outlook: Real GDP Growth Downgraded to 2.2% in FY:2019
We downgrade our growth forecast for 2019 to 2.2% from the initial expectation of 2.5%, driven by the slower than expected growth in the non-oil sector. In the agriculture sector, there is scope for improvement due to the harvest season in H2:2019 but we believe the sector is not out of the woods due to prolonged security issues. We expect a muted recovery in the manufacturing and services sectors due to still weak but slowly improving consumer spending. In the oil sector, we expect sustained growth due mainly to a weak base and our expectation of better output in H2:2019. Specifically, we see room for growth in oil production Y-o-Y but marginal growth Q-o-Q due to persistent challenges to oil production. We note that elevated insecurity as well as lower oil production and oil price are the major downside risks to our forecast. Looking ahead, we see weak prospects for growth above 3.0% in the medium-term due to structural constraints. In the absence of fast-paced reforms in priority sectors and improved fiscal conditions, we expect growth to remain below the average of 7.1% between 2000 and 2014.