• Friday, June 14, 2024
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Nigeria’s GDP seen declining in Q1 on naira crunch

Notes on monetary and financial stability

Ahead of the release of the Gross Domestic Product (GDP) report on Wednesday, some members of the Monetary Policy Committee (MPC) have highlighted leading indicators of a possible decline in GDP and employment growth in the first quarter of 2023.

The Financial Derivatives Company has also predicted that the country’s GDP will decline to 1.2 percent in the first three months of 2023 compared to 3.52 percent in Q4 2022.

“The indicators of economic activity for February 2022 give cause for concern, as all major Purchasing Managers Index (PMI) indices contracted month-on-month in February 2023,” Adeola Adenikinju, a member of the MPC, said in his personal statement at the last meeting.

He noted that composite PMI declined by 9.0 percent, industry PMI fell by 10.8 percent, agriculture PMI fell by 9.2 percent, and services PMI decreased by 8.6 percent. In addition, industry employment PMI fell by 13 percent, and overall business expectations sank by a huge -40.7 percent from -5.0 percent in January 2023.

“The currency redesign crisis, along with fuel queues, in many parts of the country are likely to drag down output and employment in the economy,” he said.

In his personal statement, Mike Obadan said the year-on-year quarterly real economic growth rate pattern reflected significant fluctuation in 2022: economy in Q1, grew by 3.11 percent; Q2, 3.54 percent; Q3, 2.25 percent and Q4, 3.52 percent. The 2022 annual growth rate was 3.10 percent compared to 3.43 percent in 2021, suggesting a weakening growth momentum, he said.

He said the observed improvement from Q3 to Q4 in 2022 was not likely to be sustained in Q1 2023 due to the sustained rise in inflation, strong monetary tightening, high energy prices, subsisting insecurity and foreign exchange market pressures, challenges of the naira redesign policy and the unintended consequences which have adversely affected domestic consumption, trade, investment and output. “In light of these, the growth rate may fall below 3.0 percent in Q1 2023,” he said.

He noted the uncomfortable shift in the sectoral composition of national output in Q4 2022. While industry’s share of output further declined from 17.27 percent of real GDP in Q4, agriculture’s share also declined from 29.67 percent in Q3 to 26.46 percent in Q4, he said.

According to him, the beneficiary of these declines in sectoral shares is the services sector, which increased from a share of 51.96 percent in Q3 to 56.27 percent in Q4 2022. “This shift elicits concerns because it further consolidates the trend of de-industrialisation in the economy – a growth pattern which has tended to by-pass industrial development.”

Robert Asogwa, another member of the MPC, said the Nigerian economy started exhibiting signs of sluggishness early in the first quarter of 2023, despite the somewhat strong finishing in the fourth quarter of 2022.

Real GDP growth in Q4 2022 increased to 3.52 percent (year-on-year) from 2.25 percent in the third quarter of 2022 and was driven by expansions in the non-oil sector, especially the services sub-sector which grew by 5.69 percent and contributed 56.27 percent of the aggregate GDP.

He said: “The agricultural sector also performed well, growing by 2.05 percent in Q4 2022, even when hampered by flood incidents across several states in Nigeria. At the moment, the earlier positive outlook at the beginning of 2023 is now threatened by both internal and external risks.

“The domestic economy is however expected to improve gradually from the second half of this year as risks stemming from external factors subside. However, uncertainties around the naira redesign policy and expected changes by the new government in June 2023 as well as fresh concerns of floods for the agricultural sector may yet pose threats to output growth in the second and third quarters of 2023. Overall, domestic output growth projections by the IMF, World Bank and the CBN for 2023 remain positive.”

Analysts at FDC said in their latest monthly economic update that the forecasted decline in Nigeria’s Q1 GDP will largely be tied to the effect of the cash crunch, which stifled aggregate demand.

“Most of the productive sectors are likely to perform sub-optimally, especially the agriculture and manufacturing sectors,” they said.

They added that sustained pricing pressures will be one of the major considerations at the MPC meeting this month.

“The MPC is likely to go with the flow, increasing the monetary policy rate by 25 basis points to 18.25 percent per annum,” the FDC said.

“While the US Fed has signalled a possible halt in interest rate hikes due to slowing inflation and banking system crisis, the Nigerian MPC is likely to remain hawkish for a longer period as inflation remains stubbornly high.”

FDC added that CBN’s tight monetary policy will keep interest rates elevated, serving as an incentive for investors to rebalance their portfolios in favor of fixed-income securities.

“Hence, the stock market will most likely sustain its bearish performance,” it said.

The financial institution said oil prices are likely to increase in the near term due to low US crude inventory, improved Chinese demand and a possible shift towards investment in commodities as the Fed signals a hold in rate hikes.

“The rise in the country’s oil rig count suggests a possible increase in domestic oil production in the coming month,” it said.