Fitch see weak recovery in private consumption as unemployment, inflation spikes on low consumer confidence
Fitch ratings see weak recovery in private consumption given persistently high unemployment and inflation, and subdued consumer confidence.
Fitch Ratings has revised downward its 2021 growth forecast for Nigeria to 1.6 per cent, from its previous expectation of 2.3 per cent.
The global rating agency in a statement yesterday, hinged its prediction on weaker base effects coming out of a shallower contraction recorded by the country in 2020.
It pointed out that rising oil exports would be the main growth driver for the country in 2021, while consumer spending and business investment were likely to be subdued because of persistently high inflation and the slow rollout of a Covid-19 vaccine.
However, it estimated that growth in the West African country was likely to quicken to 2.7 per cent in 2022, stating that by then it “expect Nigeria’s vaccination programme to gather pace, which will result in private consumption and fixed investment accelerating.”
We at Fitch Solutions have revised our estimate for Nigeria’s real Gross Domestic Product (GDP) to a contraction of 1.9 per cent in 2020, compared to our previous estimate of a 3.2 per cent fall. The revision follows the release of stronger than expected GDP data indicating that the economy exited recession in the fourth quarter of 2020, growing by 0.1 per cent year-on-year, after contracting by 3.6 per cent in the third quarter of 2020 and by 6.1 per cent in the second quarter of 2020.
“The agriculture and services sectors led the Q4 2020 rebound, expanding by 3.4 per cent and 1.3 per cent respectively, resulting in non-oil growth rising by 1.7 per cent compared to a 2.5 per cent fall in Q3 2020. The oil sector (around 8.0% of GDP) contracted by 19.8 per cent in Q4 2020 – its third consecutive quarterly contraction – because of falling oil production and weak prices.
“Crude production slowed to 1.56 million barrels per day (b/d) in Q4 2020 from 1.67 milion b/d in Q3 2020, partly because of Nigeria’s commitments under the OPEC+ deal, while the price of Brent fell to an average of $43.2 per barrel (/bbl) in 2020 compared to $64.2/bbl in 2019,” it stated
Fitch’s predicted that net exports, driven by a sharp rebound in the oil sector in the coming quarters would be the main driver of the expansion in real GDP as oil accounts for around 90 per cent of Nigeria’s exports.
Furthermore, it expects that net exports would contribute 0.6 percentage points (pp) to headline growth in 2021.
It revealed that its oil and gas team anticipated that the value of Nigeria’s net oil exports would rise by 42.5 per cent to $24.4 billion, largely because of an uptick in the average price of Brent crude to $58/bbl in 2021.
Brent crude rose to $65 per barrel yesterday.
“Oil revenues also account for around 50 per cent government revenues, and as such the rebound will strengthen public finances, resulting in a rise in government consumption, which we expect to contribute 0.3 pp to real GDP growth.
“However, the recovery in private consumption is likely to be weak given persistently high unemployment and inflation, and subdued consumer confidence.
As a result, growth in private consumption is likely to be subdued (at0.7%), and its contribution to headline growth, of 0.4pp, will be fairly small considering it accounts for around 75 per cent of total GDP.
Inflation rose every month in 2020 because of rising fuel and food costs, and accelerating price growth in 2021 – we forecast an average of 14.6 per cent compared to 13.2 per cent in 2020 – will eat into household incomes.
“Moreover, the slow roll out of a Covid-19 vaccine – our Pharmaceuticals team does not expect mass inoculations to begin before second half of 2021– will weigh on consumer confidence, while the continuation of limited social distancing measures is likely to depress business activity in the first half of the year. We therefore expect unemployment to remain high at 24.5 per cent, while fixed investment will contribute only minimally to headline growth (0.2pp),” it added.
However, it stressed that should insecurity worsen and spread beyond current hotspots in the north east and middle belt states, distribution of a vaccine would be significantly curtailed, and similarly hamper the economic recovery.