NIGERIA INSIGHT: PMI suggests economy hasn’t reached bottom yet

The renewed decline in oil production and a sliding Purchasing Managers Index suggests that the Nigerian economy has not yet reached a trough, even after a deeper GDP contraction in the second quarter.
A sharper negative contribution from hydrocarbon production and further drag on the service sector from weak domestic demand are likely to push the 3Q GDP reading further into the red. Nigeria’s 2Q GDP numbers, released on Aug. 31, confirmed the ongoing contraction of the economy.
A 2.1% year-over-year drop in activity pointed to a deepening recession, following the 0.4% decline in 1Q.
All sectors of the economy appear to be struggling from the sharp reduction in oil revenue and the ensuing shortage of foreign exchange and fuel.
The drop in hydrocarbon revenue has been exacerbated by continued attacks cutting oil output, even with Niger Delta militants entering into negotiations with the government in July. Repairs to previously bombed pipelines, such as the Forcados one operated by Shell that is due to return to production in mid-September, could lift oil production in 4Q. Still,

Still, output is unlikely to return to previous levels of 2 million barrels per day this year.

A higher base in 3Q15 than in 2Q15 could make the negative contribution to real GDP growth from the crude oil and natural gas sector even more significant in 3Q. Output in that part of the economy contracted by 17.4% year over year in 2Q and 1.9% in 1Q. While it reduced annual real GDP growth by 1.7 percentage points in 2Q, that drag could increase to more than 3.0 percentage points in 3Q due to previously mentioned base effects, as oil production has remained curtailed by militant attacks.

The non-oil sector declined by a more moderate 0.38% year over year in 2Q compared with a 0.18% contraction in 1Q. An improved, positive contribution from agriculture — 1.0 percentage point in 2Q versus 0.6 in 1Q, as year-over-year growth accelerated to 4.5% from 3.0% — was not sufficient to offset shrinking output in the industrial and services sectors. The contraction in manufacturing and electricity output was actually milder than in 1Q, but the services sector contracted by 1.3% compared with a 0.8% expansion in 1Q, subtracting 0.7 percentage point from headline GDP growth.

With annual inflation accelerating to 17.1% in July, compared with 9.2% the same month last year, the service sector is most likely suffering from weaker demand in 3Q. That could push its contribution to economic growth further into the negative range.

Indeed, the drop in the PMI in August to a record-low 46.3 from 48.8 in July should further damp expectations for an improved GDP reading in 3Q. While the Nigeria PMI was introduced only in January 2014, the drop from readings of 52-55 in mid-2015 tracks with the shift into negative year-over-year GDP growth rates.

The dive further below 50 — the line separating expansion from contraction — indicates that the decline in economic activity is accelerating, rather than easing. This, together with the deeper drag from the oil and gas sector, is likely to see real GDP growth dip further in 3Q. It should also strengthen expectations for a full-year contraction in economic activity this year.

Bloomberg Intelligence