Q3:2019 GDP Report: Sustained Expansion in the ICT Sector Lifts Economic Growth to 2.3%

The Q3:2019 GDP report published by the National Bureau of Statistics (NBS) revealed soft recovery in economic growth at 2.3% Y-o-Y (vs 2.1% Q2:2019 as revised); the highest since Q4:2018, driven by a slow but increasing growth in the non-oil sector. Growth in the oil sector slowed at 6.5% Y-o-Y in Q3:2019 (vs 7.2% Q2:2019). We attribute this to a weak base given a 5.2% Y-o-Y increase in oil production to 2.04mbpd, also higher by 1.0% on a Q-o-Q basis. Similar to the previous quarter, oil sector growth in Q2:2019 was revised to 7.2% from 5.2% due to an upward adjustment in oil production to 2.02mb/d from 1.99mb/d given slight improvement during the period. The non-oil sector drove growth in Q3:2019, following a still weak but increasing growth at 1.9% Y-o-Y (vs 1.6% Q2:2019), buoyed by a broad-based improvement in major sub-sectors.

Broad-based Improvement in the Agriculture Sector
Growth in the agriculture sector expanded to 2.3% Y-o-Y in Q3:2019 (vs 1.8% Q2:2019), although still slower than 3.2% growth recorded in Q1:2019. The major sub-sectors recorded broad-based increase following a faster rise in crop production at 2.4% Y-o-Y (vs 1.9% Q2:2019) and a 0.02% recovery in livestock sub-sector (vs -0.01% Q2:2019). The expansion in the agriculture sector reflects improved activities due to the onset of harvest season during the quarter. However, the sector remains threatened with persistent security issues affecting production in Northern Nigeria, although we expect improved performance for the rest of the year.

Positive Momentum in the Manufacturing Sector
The manufacturing sector exited contraction, growing at 1.1% Y-o-Y in Q3:2019 (vs -1.0% Q2:2019) driven by improved performance across board. Surprisingly, the cement sub-sector recorded a strong performance in the quarter, with a sharp rise of 6.9% Y-o-Y (vs 1.6% Q2:2019), the highest since Q3:2018. The food, beverage and tobacco sub-sector also expanded faster to 3.0% Y-o-Y relative to 1.2% in Q2:2019. While, the contraction in the textile, apparel and footwear sub-sector improved to -1.1% Y-o-Y (vs -1.4% Q2:2019). We believe the lift in the manufacturing sector mirrors improved consumer spending in the quarter due to the implementation of the 2019 budget, although performance of publicly listed manufacturing companies remains lacklustre. We expect sustained improvement in the sector in Q4:2019 to be driven by the seasonal boost in demand, relatively stable exchange rates as well as the expectation of the new minimum wage implementation.

Sustained Weakness in Trade and Real Estate Sectors Dampen Services Growth
Growth in the services sector moderated for the second consecutive quarter to 1.87% Y-o-Y in Q3:2019 (vs 1.9% Q2:2019). There was improved performance in the ICT sector relative to the slowdown seen in the previous quarter as growth stood at 9.9% Y-o-Y (vs 9.0% Q2:2019). Similarly, the telecommunications sector expanded, maintaining its double-digit growth at 12.2% Y-o-Y (vs 11.3% Q2:2019). The trade sub-sector remained underwater for the second consecutive quarter, further dipping to -1.5% (vs -0.3% Q2:2019) partly reflecting pressures in the wake of the closure of land borders between Nigeria and neighbouring countries in the quarter. The financial services sub-sector recovered from its year-long recession, growing at 1.1% (vs -2.2% Q2:2019) while the contraction in the real estate sub-sector improved at -2.3% (vs -3.8% Q2:2019). Growth in construction reflects improvement in the cement sub-sector, rising by 2.4% Y-o-Y in Q3:2019 (vs 0.7% Q2:2019).

Outlook: Real GDP Growth Unchanged at 2.2% in FY:2019
Notwithstanding improved growth seen in the quarter, we maintain our growth forecast for 2019 although we expect improved oil production to support growth amid slower rise in the non-oil sector. In the agriculture sector, there is scope for improvement due to the harvest season in Q4:2019 but prolonged security issues continue to cloud performance in the sector. We expect a tepid but sustained recovery in the manufacturing sector due to still weak but slowly improving consumer spending while growth in the trade sub-sector remains partly threatened by the FG’s decision to close the land borders and is expected to weigh on the services sector despite moderate growth in the ICT sub-sector. In the oil sector, we expect growth to be sustained, backed by a lower 2018 base and our expectation of better output in Q4:2019. We expect growth in oil production Y-o-Y, with slight Q-o-Q increase given persistent challenges to oil production. Notably, a further deterioration in security as well as a weaker-than-expected performance in oil production and oil price are the major downside risks to our expectations. Structural constraints, given slow pace of reforms in priority sectors, and improved fiscal conditions remain a concern. The current pace of growth considering the sluggish performance of the elastic and interest rate sensitive sectors presents no respite to the high unemployment rate at 23.1% and increasing level of poverty in the economy.

October 2019 CPI Report: Consumer Prices Remain Sticky Upwards
Readings from the October CPI report published this week revealed a sustained uptrend in consumer prices across board. The headline inflation rate spiked to 11.6% Y-o-Y in October (September 2019: 11.2%), rising for the second consecutive month and the highest increase since May 2018. This increase can be attributed to the 3bps uptick in M-o-M inflation to 1.1%, the second consecutive rise in the wake of the land border closure. Expectedly, food prices rose faster to 14.1% Y-o-Y in October (September 2019: 13.5%) although on a M-o-M basis, the index slightly increased by 3bps to 1.3%, bucking expectations of a moderation due to seasonalities, all things being equal. The M-o-M rise in food inflation is the first recorded since October 2016 and higher than the five-year average of 0.7%, this is significant given the usual expectation of a downtrend during the period. Core inflation halted the uptrend seen in September 2019, declining 6bps to 8.9% following a 0.7% decline in M-o-M core inflation.

The FG’s unrelenting stance on the land border closure since August 2019 with further extension to January 31, 2020 remains gloomy for consumer prices. However, the outcome of negotiations aimed at reopening the land border is dependent on the neighbouring countries capacity to meet the FG’s requirements. A joint border patrol team set up by Nigeria, Benin and Niger Republic to tackle smuggling is expected to meet on November 25th and 26th, a favourable outcome could provide a reprieve to the rising consumer prices. Nonetheless, barring any positive upturn of events and given near-term uncertainties, we expect persistent rise in food prices in addition to increased consumer spending due to the festive season. However, we maintain our FY:2019 average monthly inflation forecast at 11.5%. Meanwhile, the seemingly insurmountable insecurity challenges in the middle-belt and the rest of Northern Nigeria, imminent adjustments to prices of electricity and petrol as well as the elevated risk of a currency devaluation remain downside risks to inflation.