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Analysts split as MPC considers inflation, GDP data

By Babajide Komolafe & Yinka Kolawole

Nigeria’s economy appears to be on sustained recovery from recession as the Gross Domestic Product (GDP) grew by 0.51% (year-on-year) in real terms in the first quarter of 2021 (Q1’21).

This marks two consecutive quarters of growth following the negative growth rates recorded in the second and third quarters of 2020.

The National Bureau of Statistics (NBS), in its latest GDP Quarterly report released this evening, however, stated that the Q1 2021 growth rate was slower than the 1.87% recorded in Q1 2020 but higher than 0.11% recorded in Q4 2020, indicating a slow but continuous recovery.

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Nevertheless, quarter on quarter, real GDP grew at -13.93% in Q1 2021 compared to Q4 2020, reflecting a generally slower pace of economic activities at the start of the year.

NBS further noted that in the quarter under review, aggregate GDP stood at N40.014 trillion in nominal terms.

This performance is higher when compared to the first quarter of 2020 which recorded aggregate GDP of N35.647 trillion, indicating a year on year nominal growth rate of 12.25%.

The nominal GDP growth rate in Q1 2021 was higher relative to 12.01% growth recorded in the first quarter of 2020 as well as the 10.07% growth recorded in the preceding quarter.

The report stated that for the Oil sector, “in Q1 2021, average daily oil production stood at 1.72 million barrels per day (mbpd), or 0.35mbpd lower than the average daily production of 2.07mbpd recorded in the same quarter of 2020 but higher than the production volume of 1.56mbpd recorded in the fourth quarter of 2020.”

For the Non-Oil sector, NBS stated: “The non-oil sector grew by 0.79% in real terms in Q1 2021, which was -0.75% points lower compared to the rate recorded in the same quarter of 2020 and -0.89% points lower than rates recorded in the fourth quarter of 2020. “Growth in the non-oil sector was driven mainly by the Information and Communication (Telecommunication) sector while other drivers include Agriculture (Crop Production); Manufacturing (Food, Beverage & Tobacco); Real Estate; Construction and Human Health & Social Services.

“In real terms, the Non-oil sector accounted for 90.75% of aggregate GDP in the first quarter of 2021, higher than its share in the first quarter of 2020 which was 90.50% but lower than 94.13% recorded in the fourth quarter of 2020.”

MPC considers inflation, GDP data

Meanwhile, analysts are divided over the possible outcome of the Monetary Policy Committee (MPC) meeting holding today and tomorrow especially regarding the direction of the Monetary Policy Rate (MPR) vis-a-vis the latest inflation and GDP data.

The MPR was reduced twice last year, in May from 13.5 per cent to 12.5 per cent, and   in September further down to 11.5 percent.

The decision on the MPR and other policy rates   is expected to be majorly guided by the data on Gross Domestic Product (GDP) for Q1’21, as well as the April inflation data released by the bureau last week.

According to the bureau, the annual inflation rate fell to 18.12 per cent in April from 18.17 per cent in March, thus halting a 19 month upward trend.

This surprising though slight decline in the inflation rate, according to analysts, will dampen consideration for hike in the MPR among the MPC numbers.

But while some analysts are expecting retention of the MPR at 11.5 per cent, others argue that the outcome of the MPC meeting could go either way.

In this regard, CardinalStone Research said: “We believe the halt in inflation provides a hitherto muted argument for advocates of dovish monetary policy ahead of the policy meeting. 

In the previous two policy meetings, the doves have accumulated 100% (January) and 67% (March) of total votes to ensure that previously instituted stimulatory monetary measures remain in place.

“With the MPC previously signaling plans to combat inflation head-on if growth strengthens and price pressures accentuate, the slowdown in inflation may have, once again, cemented the likelihood that the hawks would remain in the minority at the MPC and calmed expectations of an indicative rate hike even after a positive Q1’21 GDP report.”

Similarly, analysts at Financial Derivatives Company Limited (FDC), said: “All eyes will now be on the MPC at their meeting next week to see their reaction to the unexpected drop in inflation. The GDP numbers are scheduled for release on May 24.

 We are projecting a mild contraction of 0.5%. Our view is that the committee would maintain its current stance and watch the indicators closely.

“This is because inflation is likely to increase again in the month of May due to output shocks and supply chain disruptions as a result of heightening insecurity. This will be compounded by exchange rate pressures and higher logistics costs.”

While also expressing a similar expectation, analysts at Cowry Assets Management Limited however hinted at the possibility of a rate hike.

“Despite the surprise moderation in inflation rate, we remain cautiously optimistic and expect prices to remain sticky due, in part, to the ongoing rainy season and the lingering effects of structural bottlenecks and insecurity. Meanwhile, we expect the Monetary Policy Committee (MPC) to at least hold the Monetary Policy Rate (MPR) constant. Nevertheless, we do not rule out the possibility of the Committee increasing the MPR in order to further consolidate its move to stabilize the depreciating exchange rate.

On their part, analysts at United Capital analysts projected that the decision of MPC hangs in the balance.

“Following the positive surprise in inflation, we reckon this may marginally tilt the decision of the Monetary Policy Committee (MPC) at its next meeting. “Nevertheless, we note the probability of a rate hike/hold hangs in the balance given doubts on the sustainability of April’s disinflation, the already precarious high level of inflation and fragile state of economic recovery. We maintain our view that the CBN’s most effective tool will be managing the exchange rate to reduce importation cost while key structural constraints are fixed,” they said.

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