August 26, 2021/United Capital Research
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Q2-2021 GDP Flash: Economy records underwhelming rebound
Earlier today, the National Bureau of Statistics (NBS) published the Q2-2021 GDP numbers. As expected, real GDP expanded in Q2-2021, making it the third successive quarter of expansion. According to the report, real GDP grew by 5.0% y/y (lower than our estimate), representing the slow but steady economic recovery. GDP growth underperformed our estimates due to lower-than-expected crude oil production as well as drag in the agriculture sector. Notably, Q2-2021 GDP growth contracted 0.8% q/q, evidencing the level of weakness in the economy in Q2-2021.
During the period, the decline in Covid-19 cases in the country supported the rebound as it enabled largely unrestricted economic activity and improvement in consumption, as well as improved trade due to eased global restrictions. We also note that the record growth level was driven by the low base impact from Q2-2020 (where GDP contracted by 6.1% y/y). That said, while the economy has shown a decent rebound, it remains below pre-pandemic levels, indicating underlying economic weakness. Notably, of the 19 sectors in the NBS’s classification, 16 expanded while three sectors contracted. The green spots include Trade, Information and Communication, Construction, Utilities, and Agriculture. Specifically, the Electricity and Transportation sectors were stand-out performers with 78.2% and 76.8% expansion, respectively. On the flipside, Oil Refining, Crude Petroleum and Natural Gas and Financial Institutions underperformed with -46.8%, -12.7% and-4.5% y/y contraction, respectively.
Oil GDP: OPEC+ quota keeps sector underwater
Oil sector real output contracted steeply by 12.7% y/y in Q2-2021 (vs. -6.6% y/y and -2.2% y/y in Q2-2020 and Q1-2021, respectively). The contraction was a result of weaker oil production levels in Q2-2021, as average daily production declined by 11.0% y/y to 1.6mbpd (from 1.8mbpd in Q2-2020) and 6.4% q/q (from 1.7mbpd in Q1-2021). The decline in oil production is directly associated with OPEC+ production cuts, as well as sustained cut back of investment in the upstream sector. Overall, the oil sector’s contribution to real GDP slid to 7.4%, (vs 8.9% and 9.3 % in Q2-2020 and Q1-2021 respectively) due to contraction in output relative to other sectors.
Non-Oil Sector: Growth for the second consecutive quarter
The non-oil sector grew by 6.7% y/y in Q2-2021, an increase of 5.9ppts compared to the preceding quarter (Q1-2021: 0.8% y/y) and 12.8ppts higher than growth in the same period in 2020 (Q2-2020: -6.1%). During the period under review, the sector was mainly driven by Electricity, Transportation (Road transport), Trade, Information and Communication (Telecommunications), Manufacturing (Food, Beverage & Tobacco) and Agriculture (Crop Production). The growth reflects the impact of the full reopening of the Nigerian economy which evidently drove strong rebound relative to the same period in 2020, when the pandemic initially forced full restrictions. In addition, the non-oil sector enjoyed the impact of a significantly low base from Q2-2020 (where it contracted 6.1%). The non-oil sector accounted for 92.6% of total real GDP in Q2-2021 (vs. 91.1% in Q2-2020 and 90.6% in Q1-2021), due to the oil sector contracting. Notably, the Transportation and Storage sector saw the highest level of recovery as it overturned contraction of 49.2% in Q2-2020 and 21.9% y/y in Q1-2021 to a 76.8% y/y expansion in Q2-2021, due to resumption of vehicular and airways movement. Also, Trade grew by to 22.5% y/y (vs. -2.4% in Q1-2021 and -16.6% in Q2-2020), supported by the reopening of land borders. Other sectors that recovered include the Electricity (78.2% y/y -3.0% in Q2-2020 and 8.7% in Q1-2021) and the Manufacturing (3.5% vs. -8.8% in Q2-2020 and 3.4% in Q1-2021) sectors.
Agricultural Sector: Growth takes a hit, slows to the lowest in five quarters
The agriculture sector growth settled at 1.3% y/y in Q2-2021, slower than 2.3% y/y and 1.6% y/y in Q1-2021 and Q2-2020. The sector contributed 23.8% of overall GDP, lower than 24.7% in Q2-2020, yet higher than the contribution in Q1-2021 (22.4%). Growth in crop production, which accounted for 87.3% of the sector’s output, moderated to 1.4% (vs. 2.3% in the preceding quarter). Farmer-herder crisis and banditry activities in key food-producing states continue to discourage farming activities, making the sector highly vulnerable to insecurity. Notably, the Livestock (0.1% y/y from 1.7% y/y in Q1-2021) and Fishing (2.3% y/y from 3.2% y/y in Q1-2021) sub-sectors also recorded slower growth.
Manufacturing sector: Manufacturing activities improve by 3.5% y/y
The manufacturing sector expanded by 3.5% y/y in Q2-2021, a marginal improvement from 3.4% y/y in Q1-2021 and a decent rebound from the 8.8% contraction in Q2-2020. This reflects sustained recovery in manufacturing activities thanks to an absence of pandemic-related restrictions and the resultant resumption of economic activities, supported by improved consumer demand. The recovery in manufacturing was driven primarily by recovery in the Food Beverage & Tobacco (+4.9% y/y), Cement (+3.9% y/y), and Textile, Apparel & Footwear (+1.8%) sectors, as well as strong growth in Chemical and Pharmaceutical Products (+9.2% y/y), Motor Vehicles and Assembly (+4.8% y/y) and Other Manufacturing (+4.4% y/y). Notably, Oil Refining (-46.8%) recorded the only negative y/y performance in manufacturing, a consequence of lower crude refining operations in Q2-2021.
Outlook: Q3-2021 GDP to further improve
Evidently, the strong recovery in private consumption in Q2-2021 was a result of Nigeria being largely free of high Covid-19 caseloads during the period. However, as seen with the recent surge in Covid-19 cases and the threat of the Delta variant, we note that Covid-19 remains a downside risk and could slightly impact consumer spending if authorities are forced to reimpose some restrictions. That said, we expect any possible restrictions to be mild and as such, we do not expect the impact on consumer spending to be anything close to the previous two waves of infections.
Across the sectors, the non-oil sector is expected to continue to recover as the rebound in economic activities will continue to bolster recovery in the key subsectors, particularly Trade and Transportation & Storage. In addition, the manufacturing and construction subsectors will benefit significantly from a re-opened economy and removal of movement restrictions. Also, the low base from Q3-2020 would further magnify recovery in Q3-2021. That said, we note that the Agriculture sector should rebound in Q4-2021 particularly as we approach the harvest season. However, we retain long term concerns on the impact of insecurity on the sector.
In the oil sector, we expect improved oil production in H2-2021, given the low base of crude oil production H2-2020 and expected relaxation of OPEC output cap through the year as oil demand recovers. While we note the recent spike in Covid-19 caseloads may become a source of worry, recent reports from key fuel consuming countries like the US suggests fuel demand continues to rise as governments are reluctant to implement new widespread lockdown measures. Also, the classification of Agbami oil grade, as condensate, implies Nigeria’s condensate production would improve while giving it further room to pump more crude since Agbami grade will be removed from its quota calculation. Lastly, we recall that Nigeria’s production quota was increased by OPEC+ at its last meeting implying oil production for the rest of the year should pick up albeit below pre-pandemic levels.
Overall, we maintain an optimistic bias for economic growth in 2021. However, the Q2-2021 GDP growth significantly underperformed our expectations, thus, we revise our full-year projections lower to 2.4% economic growth rate. We expect consumption to continue apace in Q3-2021 and Q4-2021, supporting output growth in the economy. Additionally, the impact of the low base from Q3-2020 will magnify recovery in Q3-2021 (we project a 3.0% y/y expansion in Q3-2021).
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