Nigeria: Firm predicts lower output growth for Q1 2024
Omeiza Bilal
Research firm, Cape Consulting has stated that in spite of the economic headwinds, Nigeria’s first quarter 2024 output growth is expected to be lower than the fourth quarter of 2023.
In its Economic NewsLetter of May 2024, the research firm noted that despite lower growth, the country’s economy remains positive.
The company stated that in spite of the elevated inflation in Nigeria, the growth of output and new orders remained modest in April 2024. Private sector economic activities were constrained by the increases in input costs and output prices, thereby slowing down demand for new orders.
“The Stanbic IBTC purchasing managers’ index (PMI) for April 2024 inched higher to 51.1 index point from 51.0 index point in March 2024.
“The marginal improvement in private sector business activity is linked to the 22.5 percent month-on-month appreciation of exchange rate recorded in April 2024, which led to slower rate of price increases.
“Thus, second quarter of 2024 kicked off on a better note. However, increasing and sustaining this improvement would be crucial for seeing an impressive output growth in Q22024. We remain optimistic that Nigeria’s real GDP growth in the second quarter of 2024 would remain positive amid a plethora of headwinds,” the research firm stated.
Output growth outlook
Output growth remains resilient despite numerous challenges. Elevated energy costs, exchange rate volatility stemming from foreign exchange deficits, insecurity, infrastructural gaps, structural impediments, and elevated production expenses continue to impede output growth. Consequently, a further deceleration in output growth is anticipated, though it is expected to stay positive, Q1 and Q2 2024.
Price update
Despite aggressive tightening measures by the monetary authority in recent months, Nigeria’s inflationary pressure continues unabated. In March 2024, headline inflation surged to 33.2 percent, up from 31.7 percent in February 2024, indicating a 1.5 percentage point increase in the general price level. Year-on-year, headline inflation was 11.16 percentage points higher than March 2023’s 22.04 percent, driven by persistent higher input prices, exchange rate issues, and insecurity. However, the month-on-month headline inflation rate slightly slowed by 0.1 percentage points, suggesting a lower rate of increase in the average price level in March (3.02 percent) compared to February’s 3.12 percent. Food inflation followed a similar trend, soaring to 40.01 percent in March 2024 from February’s 37.92 percent. Year-on-year, food inflation increased significantly by 15.56 percentage points. This was driven by price increases in essential food items such as Garri, Millet, Akpu, Yam Tuber, Water Yam, Dried Fish, among others.
Price outlook
Inflation is expected to further heighten in April 2024. Our forecast showed that inflationary pressure would heighten as headline, food and core inflation are expected to rise to 33.69, 40.51 and 26.54 per cent respectively.
The key drivers of the headline inflation forecast remained, food prices, exchange rate, housing and utility prices which contribute 4.70 per cent, 0.38 per cent, and 0.31 per cent respectively.
Our analysis highlights the significant influence of food prices, the exchange rate, housing, and utilities on headline inflation. It suggests that the effects of the increase in energy prices and the exchange rate, following the deregulation in June 2023, are still reverberating throughout the economy. These factors are expected to continue impacting inflation for at least a 12-month period due to base effects.
Fiscal operations update
In April 2024, a fiscal injection of N1,123.39 billion was recorded to emanate from the Federation Account Allocation Committee (FAAC) meeting which distributed the aggregate revenue collected in the month of March 2024.
The banking system liquidity was elevated by the amount of this injection with attendant implication for inflationary pressure.
The amount distributed in April 2024 was lower than the N1,152.76 billion distributed in the preceding month by N29.37 billion representing a decline of 2.5 per cent.
The decrease was driven by low performance of excise duty, oil royalty, petroleum profit tax (PPT), customs external tariff levies (CET) and electronic money transfer levy (EMTL).
Further breakdown showed that Federal Government received N345.89 billion; States, N398.69 billion; Local Government, N288.69 billion. Thirteen per cent derivation fund distributed among beneficiary states amounted to N90.12 billion. Compared to March allocations, disbursements to federal declined by 1.9 percent while those of state and local governments increased by 8.6 and 8.1 percent, respectively. and 2.0 percent, respectively.
The 13 percent derivation fund distributed among oil producing states recorded a significant decline of 45.8 percent. In a high inflation regime, a fiscal injection of over N1.1 trillion may contribute to further build-up of inflationary pressure in Nigeria.
The company stated that prospect for global output growth for 2024 remains positive but weak.
“Prospects in emerging economies is significantly challenged by uncertainty and weak performance of China. The tight stance of most central banks across both advanced and emerging markets has started crystalising into price moderations in some economies. However, this comes with a significant tradeoff to output and financial stability.
“In Nigeria, economic prospects for the 2024 Q1 and going into the 2024 Q2 remains resilient, albeit encumbered with a lot of headwinds,” it said.
