Q1:2019 GDP: A Broad-based Economic Slowdown Pulls Growth Lower at 2.0%

Based on the recently released Q1:2019 GDP report, the Nigerian economy expanded at a slower pace of 2.0% Y-o-Y (vs 2.4% in Q4:2018), below both our expectation and analysts’ consensus forecast of 2.5% aggregated by Bloomberg. The moderation in growth was due to a broad-based slowdown across the oil and non-oil sectors. The oil sector contracted for the fourth consecutive quarter at -2.4% Y-o-Y in Q1:2019, deeper than the contraction of -1.6% in the previous quarter. This was due to a reduction in oil production by 20,000bpd Y-o-Y to 1.96mb/d in Q1:2019, although oil production increased by 50,000bpd on a Q-o-Q basis. Despite our optimism of improved oil production closer to the post-recession high of 2.0mb/d due to the new Total Egina FPSO, the shutdown of export terminals for maintenance and repairs was a drawback. In the non-oil sector, growth moderated to 2.5% Y-o-Y in Q1:2019 from 2.7% in the previous quarter. Despite the slowdown in the non-oil sector, this is the second highest quarterly growth rate since 2015. Perhaps this was stronger on a seasonally adjusted basis as growth received a big boost during the festive season in Q4:2018.

Agriculture Expands at Fastest Pace in Five Quarters
In line with our expectation, the agriculture sector continued to recover as growth reached 3.2% Y-o-Y in Q1:2019 (Q4:2018 – 2.5%), the highest in five quarters. The performance was driven by stronger growth of 3.3% Y-o-Y in crop production (Q4:2018 – 2.5%) and 0.8% in livestock (Q4:2018 – 2.4%), with both sub-sectors accounting for 95.6% of the agriculture sector. Despite the modest improvement seen in Q1:2019, we do not believe the agriculture sector is out of the woods yet due to prolonged security issues. Famine Early Warning Systems Network (FEWS NET) reports show continued insecurity in Northern Nigeria due to insurgency and the herder-farmer conflict. Going forward, we expect farmers to continue to benefit from CBN’s credit disbursement to the sector, even though the administration of such is prone to inefficiencies which also makes us unable to accurately estimate the likely impact. We highlight that late planting of crops due to delayed rains could affect agriculture output in subsequent quarters.

Widespread Slowdown in the Manufacturing Sector
In Q1:2019, growth in the manufacturing sector slowed to 0.8% Y-o-Y in Q1:2019 (vs 3.4% in Q4: 2018), the weakest since Q2:2018. This can be attributed to lacklustre growth across the major sub-sectors. Growth in the cement sub-sector expanded faster at 2.8% (vs 0.98%in Q4:2018), but growth in the textile, clothing & apparel sub-sector slowed to 1.0% (vs 1.7% in Q4:2018) while the food, beverage and tobacco sub-sector also saw a weaker performance at 1.76% (vs 2.2% in Q4:2018). We believe the slowdown in manufacturing sector growth reflects weak but slowly improving consumer spending. Going forward, we expect relative stability in exchange rate and improved consumer spending due to the implementation of the new minimum wage to support growth.

Services Sector Growth at Three-quarter Low
The services sector turbocharged the economy for most of 2018. However, early indications from Q1:2019 are that growth in services might be slowing. Services growth moderated to 2.4% Y-o-Y in Q1:2019 (Q4:2018 – 2.9%), the weakest in three quarters. However, there was a mixed performance across the large sub-sectors. In the ICT sector, which has recorded strong growth of late, there was an expected slight moderation to 9.5% Y-o-Y (Q4:2018 – 13.2%). Similarly, growth slowed in the trade sub-sector at 0.8% Y-o-Y (Q4:2018 – 1.0%). Across the major sub-sectors, only financial services stayed in the negative territory, recording a deeper contraction of 7.6% Y-o-Y in Q1:2019 compared with -1.8% in the prior quarter. On a positive note, the construction sub-sector advanced at a faster pace of 3.2% Y-o-Y in Q1:2019 relative to 2.0% in the previous quarter. Meanwhile, the real estate sub-sector turned positive at 0.9%% Y-o-Y (Q4:2018; -3.8%), the first expansion since Q4:2015.

Outlook: Real GDP Forecast Unchanged at 2.5% in FY:2019
Our Real GDP growth outlook remains unchanged for the base case at 2.5% for FY:2019. We expect a return to growth in the non-oil sector over the subsequent quarters due to base effect and improving oil production, although we note that maintenance and repairs of oil infrastructure may impose a toll. In the non-oil sector, we anticipate sustained momentum due to the expected improvement in consumer spending as a result of the minimum wage increase. Notably, we expect output growth in the agriculture sector to remain steady at current levels. A marked reduction in oil price and production as well as heightened insecurity across the country are the key risks to our projection.

This brings into focus, our agelong call for critical reforms that will catalyse the economy towards a double-digit growth path, at least for the next ten years. At the current pace, we do not foresee the most optimistic growth projection exceeding 2.5% over the next five years, a level below the population growth rate. In our view, as long as the economy operates at this sub-optimal growth benchmark, poverty levels would continue to escalate as unemployment rises and the government would remain handicapped in translating human resources to capital as education and health suffer from underinvestment.