Contraction in Household Spending Drags Half Year 2016 GDP by Expenditure

The National Bureau of Statistics (NBS) late last month released Q1 and Q2 2016 GDP by expenditure data. Expectedly, the data showed the economy on a sticky wicket, which is in line with observations from supply side computations released for the two quarters much earlier in the year. However, the statistics give us a better view of structural and cyclical demand-side drivers of the business cycle.

For the two quarters, decline in household consumption expenditure which contributes more than 60.0% to normalized aggregate spending in the economy accounted for much of the GDP contraction observed in the period. In H1:2016, Household and Government consumption expenditure fell 21.5% and 18.6% Y-o-Y in real terms to N18.9tn and N1.6tn respectively. The sharp contraction in consumption spending reflects weak fiscal revenue and steep increase in consumer prices pressuring household disposable income, which we believe accounted for the tepid real household spending as purchases were up 7.5% in nominal terms.

Investment spending (gross fixed capital formation) remarkably grew at an impressive rate of 9.9% Y-o-Y in real terms although Inventories were down 8.8% Y-o-Y to N5.4tn and N237.8bn respectively. We are particularly surprised that investment spending improved given the disappointing performance of sectors that typically respond to stronger investment spending such as Construction, Cement and Mining & Quarrying in half year production estimates. This leaves agriculture sector as the possible driver of investment spending. The falling level of Inventory however fits into the narrative implied from PMI readings throughout the year which have consistently shown declining level of Raw Materials/Work in Progress Inventory.

Net export also outperformed in real terms, growing 9.0% Y-o-Y to N6.2tn in H1:2016, although mostly due to high prices of crude oil captured in benchmark base year of 2010 currently being used for real GDP measurement. In nominal terms, Net Export was in deficit as imports exceeded exports.

Our view is that consumption expenditure will continue to underperform (and weight on aggregate GDP) in the near term due to declining real wage and increasingly parsimonious/thrifty consumers wary of uncertain economic outlook and also taking advantage of high interest rate environment to save. The only positive from the data is that capital stock is increasing but the pace still remains low to make up for falling government and household consumption spending. We believe policy measures to ease supply side shortages in the economy – particularly for FX – and subsequent easing of monetary policy will go a long way in stimulating investment and consumption spending to support aggregate economic performance.

November 2016 Inflation Projection
Ahead of scheduled  release of November 2016 inflation data next week, we project a flattish M-o-M CPI growth (at 0.8%) but expect Headline Inflation rate (Y-o-Y) to accelerate to 18.5% from 18.3% in previous month due to low base effect. Inflationary pressures have been moderating in recent months due to stable energy prices and harvest of agricultural produces. Despite this, and general investor view that Inflation rate would moderate in 2017 due to high base factor, yields in the fixed income market have continued to rise and may not reverse trend as a result of FX illiquidity anchoring expectation of sustained tight monetary policy even as market continues to price-in medium term risks and anticipation of increase in fiscal deficit in 2017 into valuation.