Nigeria: Economy contracts heavily in Q2 on double pandemic and oil price blow
August 24, 2020
The economy was dealt a severe blow by the oil price slump and Covid-19-induced restrictions in the second quarter. Economic activity collapsed 6.1% on an annual basis in Q2 (Q1: +1.9% year-on-year), a much greater hit than what market analysts had expected. The reading marked the first decline in output since Q4 2017 and the worst slump in at least a decade.
Sharp contractions in both the oil and non-oil segments of the economy drove the downturn. The non-oil economy shrank 6.1% year-on-year (Q1: +1.6% yoy) particularly as lockdowns in the commercial hub Lagos and the capital Abuja pummeled activity. The manufacturing, trade, construction, hospitality and transportation sectors were especially hit. Meanwhile, although agricultural output increased, it eased again in the second quarter (Q2: +1.6% yoy; Q1: +2.2% yoy).
As for the all-important energy sector, activity also reeled, contracting 6.6% over the same quarter last year (Q1: +5.0% yoy). In addition to weak oil prices persisting after their crash in March, crude production was also pared back—coming in at 1.81 million barrels per day (mbpd), the lowest level in over three years (Q1: 2.07 mbpd).
The pandemic and the oil price shock are set to plunge the economy into a severe recession this year. Considerable job and income losses as well as likely lower remittances will hamper consumer spending, while business investment will be hammered due to greater uncertainty. Tighter FX liquidity, mounting inflationary pressures and subdued global demand all cloud the outlook further.
Commenting on what lies ahead for the economy, Dylan Smith and Andrew Matheny, economists at Goldman Sachs, noted:
“Over the second half of 2020, we anticipate a rotation in negative growth contributions from the services sector to the oil industry, as the effects of lockdown easing support a partial rebound in domestic demand, while the oil industry remains under pressure. Meanwhile, we expect the CBN's FX policies to weigh on broad domestic demand and hold back the economic recovery until a meaningful FX adjustment is implemented.”
Author: Javier Colato, Economist