CBN’s benign economic outlook for Q2 deviates from consensus expectations

Nigeria’s central bank had a more benign outlook for economic growth in the second quarter (Q2) 2020 than the expectations of many economists, and even the local finance ministry.

The Central Bank of Nigerian (CBN) expects economic growth to decline by 1.03 percent in the second quarter, it said in a note published on its website. The forecast of 10 economists polled by BusinessDay shows expectations for a 2.5 percent contraction in same period, which about doubles the CBN’s forecast.

“The CBN is significantly more optimistic about the economy than we are because Q2 was when we saw consumption spending eased considerably,” said Omotola Abimbola, an analyst at Chapel Hill Denham.

“The most brutal effects of the pandemic probably happened in Q2, so it is hard to find factors that could drive a different outcome,” Abimbola said.

The International Monetary Fund (IMF) last month downgraded its growth forecast for Nigeria to a contraction of 5.4 percent from 3.4 percent.

The economy is however tipped to exit recession in 2021, after growing by 2.6 percent.

The IMF said the forecast was influenced by the larger than expected storms to global value chains due to the coronavirus, affecting global demand for goods and services.

“Disruptions due to the pandemic as well as significantly lower disposable income for oil exporters after the dramatic fuel price decline, imply sharp recessions in Russia (–6.6 percent), Saudi Arabia (–6.8 percent), and Nigeria (–5.4 percent), while South Africa’s performance (–8.0 percent) will be severely affected by the health crisis,” the IMF said.

The pandemic was at its peak during the second quarter and there are expectations for the worst of the pandemic to have taken a toll in this period, especially as that was during a lockdown that lasted five weeks and crippled business activity in the commercial capital of Lagos, as well as in Abuja, the federal capital city, and Ogun, the south-western home of several industries.

The CBN’s outlook is also more optimistic than the finance ministry’s projection for a contraction of between 4 percent and 8.9 percent.

“The CBN’s forecast is a little too optimistic and fails to reflect the PMI data for the period between April and June, which shows a contraction in manufacturing and non-manufacturing activities in the period,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham.

According to the CBN data, the Purchasing Managers Index (PMI) reading for the Q2 period was below 50, which signals contraction. A reading above 50 signals expansion. PMIs are leading indicators for economic activity.

Economic growth has also been stifled by a foreign exchange scarcity that has raised business costs and hammered purchasing power. The lockdown had devastating effects on businesses, with many having to lay off staff and slash salaries.

The Nigeria’s Ministry of Finance, Budget and National Planning made some downward projections in the annual budget for 2020, as the economic impact of the pandemic worsened.
Oil prices had declined and fell into negative territory in April and that was estimated to more than half oil revenues, which funds over 50 percent of the budget.

The total expected revenue was cut to N5.16 trillion from N8.42 trillion in the original budget.