Nigeria: Nigeria slips into recession in Q2 as deteriorations in oil production add to ongoing struggles
August 31, 2016
Africa’s biggest economy slipped into recession in the second quarter of this year. A notable disruption in oil production resulting from militant attacks and the devaluation of the naira added to ongoing struggles due to subdued oil prices, a shortage of foreign currency and import restrictions, all of which hurt the economy and caused GDP to contract at a sharper rate than in Q1. The economy fell 2.1% annually in Q2 at basic prices, which marked a deterioration over Q1’s softer 0.4% decline. At market prices, GDP contracted 2.2% year-on-year in Q2, a much steeper decline than Q1’s 0.4% drop and came in considerably below market analysts’ expectations of a more moderate 1.5% contraction.
According to the National Bureau of Statistics (NBS), Q2’s dismal performance reflected a hefty contraction in the oil sector along with growing weakness in the non-oil sector. The oil sector shrank a drastic 17.5% annually in Q2, while in Q1 it had fallen just 1.9%. Militant attacks on oil infrastructure in the Niger Delta region caused oil production to plunge from 2.11 million barrels per day (mbpd) in Q1 to 1.69 mbpd in Q2, adding to pressure from depressed oil prices and causing the sector’s notable decline. The non-oil sector also fell in Q2, dropping 0.4% annually (Q1: -0.2% year-on-year). Most areas of economic activity contracted, largely due to being interrelated with the oil sector. Among the most relevant areas of economic activity, mining and quarrying fell an immense 17.2% (Q1: -3.0% yoy), also hampered by militant attacks as well as subdued oil prices. The contraction in manufacturing activity eased from Q1’s 7.0% to a softer 3.4% annual fall in Q2. Construction activity decreased 6.3% in Q2 (Q1: -5.4% yoy). Domestic trade recorded flat growth in Q2 (Q1: +2.1% yoy), dragged down by subdued demand and higher input prices. Conversely, activities that grew in Q2 were agriculture, information and communication, water supply, arts, entertainment and recreation, scientific and technical services as well as education. In fact, growth in the important agricultural sector picked up from 3.5% in Q1 to 4.5% while information and communication decelerated from a 4.1% increase in Q1 to a 1.4% rise.
Sonja Keller and Yvette Babb, economists at JPMorgan, expect that manifold challenges will keep Nigeria’s economic activity subdued this year and that a recovery it not in the cards before next year:
“The adoption of a flexible exchange rate regime in June boosted sentiment, yet is unlikely to bring a swift turnaround in economic prospects in 3Q16, not least as poor security conditions in the Niger Delta continues to plague the oil sector. Oil output is close to levels last seen in May (1.4 million barrels of oil per day) when five out of 19 export terminals faced reduced or no production. While there has been some increase in the availability of foreign exchange, largely through central bank intervention, it is unlikely to prove sufficient to eliminate the bottlenecks to trading activity.”