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NIGERIA JUNE ECONOMIC REPORT - Oil and agriculture disruptions weigh on economy

Oil and agriculture disruptions weigh on economy                                                                         

Purchasing Managers’ Index (PMI) data from the Central Bank of Nigeria (CBN) showed a slightly brisker expansion in economic activity in June (compared to May) amid little change in economic momentum. However, insecurity headwinds strengthened during the month, exemplified by violence in Plateau State which led to over 85 deaths in late June. The economic effect of the ongoing conflict in the Middle Belt is becoming more apparent, with month-on-month food inflation rising to 1.3% in May – the highest since July 2017. On a similarly bearish note, Nigeria’s oil production challenges persisted in June as a Reuters survey projected a further drop in output even after May’s decline (by c.50 thousand barrels a day according to OPEC). Given that agriculture and oil were the primary economic growth drivers coming into 2018, the negative shocks experienced here is bad news for the Nigerian economy.                                                                           

Following a slow start to the year in Q1’18 (Q1’18 GDP growth: 2.0% y/y vs. Vetiva and Consensus forecasts of 3.4% y/y and 2.6% y/y, respectively), early indicators suggest that Q2’18 fared little better, and may be weighed a higher Q2’17 base (Q1’17 GDP growth: -0.9% y/y, Q2’17: 0.7% y/y). As such, we project the economy to have grown by 1.6% y/y this past quarter. We have a dimmer outlook for the second half of the year and have downgraded our annual growth expectations (from 2.4% y/y to 1.9% y/y) albeit still maintaining them above 2017 levels (0.9% y/y). This view is based on prevailing infrastructure issues in the oil sector which would likely lower oil production, as well as ongoing conflict in the Middle Belt that pose a significant threat to agriculture output and food security. One boost should come from higher government spending in H2’18 following the recently passed 2018 Budget (₦9.12 trillion) and expected pre-election spending in the run up to the polls.