Next week will witness a flurry of data releases from the National Bureau of Statistics (NBS). Scheduled for release on Wednesday 31st August include: Q2:2016 Unemployment and Underemployment Watch, Q2:2016 Foreign Trade estimates, Q2:2016 Gross Domestic Product estimates (Production Approach), July 2016 Consumer Price Index and Inflation, Q2:2016 Capital Importation and FDI report and July 2016 PMS/Petrol Price Watch, amongst others. Of these, focus will mostly be on the Q2:2016 GDP report and July 2016 Inflation. Analysts’ consensus forecasts on both data (including ours) is decidedly bearish and we do not expect any positive surprise from the rest.
The downtrend in growth of the Nigerian economy which began in late 2014 majorly due to falling oil prices, has persisted into 2016 as FX market illiquidity, downtime in power supply and depressed real consumer income continue to weigh on productivity, investment and consumer spending. Developments in the Foreign exchange market - which has seen the naira depreciate significantly against a host of foreign currencies – as well as increases in power and fuel tariffs have had pass-through on consumer prices with Inflation rate in June 2016 far above the CBN’s allowable band of 6.0% - 9.0% and an 8 - year high of 16.5% from 9.6% in January. Our thoughts on the GDP and Inflation data are below.
Q2:2016 Gross Domestic Product (GDP) Estimate
In Q1:2016, GDP contracted 0.4% Y-o-Y (the 1st Quarterly decline in the rebased series) as both oil (-1.9) and non-oil (-0.2%) sectors contracted. Performance by sector offers better insight. The services sector, which held up aggregate growth all through 2015 as the Industrial sector entered a recession, recorded its worst Quarterly performance with a minimal 0.8% Y-o-Y expansion relative to 4.7% Y-o-Y growth in similar period of 2015, while Industrial sector contracted 5.5% Y-o-Y and Agricultural sector grew 3.1% Y-o-Y.
We expect a real contraction (between -1.5% and - 2.0%) in Q2:2016 GDP due; 1) Constrained oil production – which is a key metric in estimating oil sector GDP – due to activities of militants in the Niger Delta which pared production levels below 1.9mbpd in the quarter, about 10.0% short of 2.1mbpd produced in Q2:2015, 2) Further weakness in growth of the Services sector – which includes trade and financial services - on account of the exchange rate shortages which peaked during the period and pressure on consumer discretionary income, and 3) Extended contraction of the manufacturing sector as suggested by Manufacturing Purchasing Managers Index (PMI) surveys carried out by the CBN between April – June 2016 in which New Orders and Production Level were below the 50.0% threshold that separates expansion and contraction.
July 2016 Inflation Rate Forecast
We expect a further rise in Inflation Rate for June 2016 driven mainly by increases in both the Food sub-index (on account of higher domestic and imported food prices) and the Core sub-index (driven by higher energy prices) within the period. As a result we forecast M-o-M CPI growth in July at 1.6% (a moderation from 1.7% in June-2016), implying a 17.6% headline Inflation rate and 1.1 percentage points increase from June 2016.
Market Reaction… Expect no Knee-Jerk Selloff?
Despite the projected weak data releases next week, we do not expect a knee-jerk reaction in the financial markets. Shorter term yields in the fixed income market are still comfortably above the projected inflation rate while expectation of a descent into recession has mostly been factored into market valuation. With kick-off of implementation of the capital component of the 2016 budget, few sectors will receive a boost in subsequent sectors, yet we remain conservative on growth in 2016 as private investment and consumer confidence continue to lag.