A very fragile exit from recession

The Nigerian economy made an exit from its 15 month recession in the second quarter of 2017 as most analysts and institutions expected; but even though the headline news is positive, the underlying structure of the marginal growth recorded was weaker and more fragile than I anticipated. The problem is not the 0.55% Q2 GDP growth announced by the National Bureau of Statistics (NBS) which was broadly in line with our expectations, but its composition!

NBS data showed that only three of our largest sectors recorded strong growth in the second quarter-finance and insurance (10.45%), agriculture (3.01%) and crude petroleum and natural gas (1.64%). Some other sectors were either too small or their growth rates too marginal for their rates of growth to matter-the manufacturing sector grew at only 0.64% and construction at 0.13% more or less zero growth; solid minerals, which grew at 2.28% is only an insignificant 0.13% of our GDP! On the other hand, the majority of sectors, including several of the large ones remained in recession even though the aggregate grew as NBS has claimed by 0.55%-trade sector contracted by 1.62% in Q2 2017 as did information and communication (1.15%), accommodation and food services otherwise known as hotels and restaurants (4.05%), real estate (3.58%), professionals etc. (1.72%), education (1.34%), health (0.96%) and arts, entertainment and recreation (0.62%).

In effect the exit from recession was most substantially accounted for by the significant swing from a 15.6% contraction in the crude petroleum and natural gas sector in Q1 to a 1.64% growth in Q2! But for this 17.24 percentage point change in the crude oil and gas sector, Nigeria would have remained in recession in the second quarter of 2017!

More worrying in the sub-text of our exit from recession are some of the underlying trends, many of which are negative in spite of the headline-most remarkably, the rate of growth of our aggregate non-oil economy retarded from 0.72% in Q1 to 0.45% in Q2 (except NBS later announces an adjustment of some of these figures) confirming that the recovery is driven simply by higher oil prices and production, and some of the by-products of that-greater FX liquidity and a slowing down of non-food inflation as FX rates moderated. Some other trends are equally concerning-agricultural growth has trended downwards for four consecutive quarters since Q3 2016 when the sector grew by 4.54%, to 4.03%, 3.39% and 3.01% by the second quarter of 2017! Manufacturing sector growth did not improve but worsened between Q1 and Q2 2017 from 1.36% to 0.64%; construction sector growth declined marginally from 0.15% to 0.13%; hotels and restaurants declined further from a negative 3.96% in Q1 to -4.05% by Q2; real estate worsened from -3.10% to -3.53%; and several sectors swung into recession in Q2 from marginal or low growth in Q1-professionals, administrative and support services, education, health and arts, entertainment and recreation. NBS also announced that it had previously over-stated economic performance in Q1 which we now know was worse than we were told-the economy contracted by 0.91% in Q1 2017, and not 0.50%! In short in the underlying trends, most of our economy got worse not better in the second quarter of this year!

Even when we examine the sub-sectors within the manufacturing sector, both levels and trends are mostly negative-I have mentioned that the whole of manufacturing grew by only 0.64% surprisingly a decline from the 1.36% of the previous quarter. Worse still the movements in the three largest manufacturing sub-sectors were also in the wrong direction-food, beverage and tobacco, which is 46% of Nigerian manufacturing grew by only 2.67%, lower than 4.07% in Q1; cement went into negative territory by 4.10%; textile, apparel and footwear grew by a marginal 0.2% a decline from 1.17% in Q1; and most other manufacturing sub-sectors did worse in Q2 than in Q1.

So the bottom-line is that we do not yet have a policy-driven, sustainable recovery, but one aided by events beyond our control-oil prices. The finance and insurance sector showed strong growth, but the two drivers are actually negative for the overall economy-high treasury bill rates occasioned by weak fiscal conditions and opportunities for FX arbitrages resulting from distortions in exchange rates! The banks are thus temporarily isolated from economic fundamentals due to policy errors! The utilities sector which recorded the highest growth in Q2 at almost 24% is good (this is composed of electricity and water supply and sewage) but the growth recorded is from a low base and the levels are yet very low and inadequate for our economic development. Some of the improvements may also be unsustained or unsustainable without fundamental changes in policy and execution.

The other point I would note is that while headline inflation has moderated downwards to 16.05% from a peak of 18.72%, most Nigerians argue that they cannot feel it; and they are right, when you look at food inflation which continues to rise (and has reached 20.3% in July 2017) as well as clothing and footwear, household equipment and health. These are of course basic needs of the people!

Nigeria’s population continues to grow at 3.2% per annum while the economy contracted in real terms in 2016 and the first quarter of 2017. We need growth above the rate of population growth to make a dent in poverty, inequality and unemployment. In effect our people are getting poorer and more miserable! As we have seen the 0.55% growth in Q2 was driven by oil and to a lower extent by financial services and agriculture. With regard to agriculture we have also observed a declining rate of growth, which one might attribute to the conflicts between herdsmen and farmers in large swathes of central Nigeria, which is evidently having an impact on agricultural production. It is not yet uhuru!

Opeyemi Agbaje