September 10, 2019/InvestmentOne Report
· Recently, the National Bureau of Statistics released the Q2 2019 GDP report which showed that the economy grew by 1.94%y/y in real terms compared to a growth of 2.10% y/y in Q1 2019 and a growth of 1.50% y/y in Q2 2018. In contrast to growth in the last four quarters, GDP growth in Q2 2019 was inclusive from the broad perspective as both Oil and Non-oil sector grew by 5.15%y/y (8.82% of GDP) and 1.64%y/y (91.18% of GDP) in the quarter.
· Although, oil output bounced back (+5.15%y/y in Q2 2019), after falling on a year on year basis in the previous four quarters, due to the new Egina plant that was opened late last year. We highlight that the Q2 2019 oil production level of 1.98million barrels per day (mbpd) was still below benchmark of 2.3mbpd set for 2019 budget.
· Despite the expansion shown by PMI readings so far this year, non-oil slowed to its lowest since Q2 2018. Of course, the reasons are not far-fetched as the country still faces challenges of weak consumer demand, delay and low implementation of budget, poor infrastructures and insecurity.
· A further breakdown of the non-oil sector showed that growth in Agricultural output slowed to 1.79%y/y in Q2 2019 as the effect of insecurity in the North outweighed any impact the recent monetary and fiscal policy on the sector may have on food production. We highlight that this was the lowest growth rate in the last four quarters.
· Growth in the Manufacturing sector continued to weaken as it recorded a negative growth of 0.13%y/y in Q2 2019 compared to growth rates of 0.81%y/y in Q1 2019 and 0.68%y/y in Q2 2018. We believe weak infrastructures and lack of clear policy that will support FDI into manufacturing sector could have caused the continuous poor performance of the sector.
· Construction output was also weak with a meagre growth of 0.67% y/y in Q2 2019 lower than 3.18%y/y in Q1 2019 and 7.66%y/y in Q2 2018. We believe the slow growth in Construction may be due to weak implementation of Capital projects by the Federal Government on the back of delay in budget passage and appointment of ministers. The late passage of the 2019 Appropriation Bill, the shortfall in expected revenue as well as the increasing non-discretionary expenditures of government affected the implementation of capital projects in the 2018 Budget.
· Telecommunication continued to support growth at 9.01%y/y in Q2 2019 but weaker than growth rates of 9.48%y/y and 11.81%y/y in Q1 2019 and Q2 2018 respectively.
· Having fallen in twelve straight quarters, Real Estate sector recorded a growth of 0.93% in Q1 2019 but returned to a negative growth of 3.84%y/y in Q2 2019 . We believe the major challenge to this sector remains a lack of credit facilities. We highlight that only 4% of the Deposit Money Bank credit was allocated to the sector in Q1 2019.
· We believe issues such as uninspiring levels of CAPEX implementation, herdsmen attack, insecurity in the North, infrastructural deficit and contagion effect of a potential slowdown in global growth may continue to limit Nigeria’s GDP growth in 2019. It is pertinent to know that growth rate as at H1 2019 stood at 2.02% which still below population growth rate of 2.6%. This accentuates the rising rate of poverty in the country as per capita income continues to fall. This further highlights the need to put in policies that will spur growth in the near term in order to save the country from another recessionary threat and boost per capita income.
· Overall, we may not see the economy growing at 3.01% as targeted by the Federal Government. We only expect the economy to grow by 2.20% lower than our estimate of 2.30% at the beginning of the year. Our lower estimate is based on less inspiring output from non-oil sector on the back of weak budget implementation and lack of clear policy direction for growth. We highlight that our latest projection is lower than International Monetary Fund‘s (IMF) estimate of 2.3% but higher than the World Bank’s projection of 2.10% in 2019.