Nigeria’s economy may shrink as business activity tumbles

Nigeria’s economy is likely to contract in the second quarter, according to three gauges of business activity that highlight the difficulties the central bank faces in trying to stave off a recession in Africa’s largest economy.

Stanbic IBTC Bank and IHS Markit’s purchasing managers index rose slightly to 40.7 in May from 37.1 the previous month, suggesting economic conditions are worsening even as the government relaxes a lockdown in key cities to curb the spread of the coronavirus.

“We expect the PMI reading will continue to pick up over the coming months as economic activities continue to rise, however, it will mostly remain below the 50 mark, which signals a contraction,” Gbolahan Taiwo, an economist with Stanbic, told Bloomberg in a statement released on Wednesday. The lender expects the economy to contract 3.3% this year on lower oil prices and the fallout from the coronavirus pandemic.

Central Bank Governor Godwin Emefiele surprised markets with a 100-basis-point interest-rate cut last week, arguing looser monetary policy coupled with fiscal stimulus could rescue the economy from recession. He said the drop in output in Africa’s top oil producer could be less than the 3.4% projected by the International Monetary Fund.

The central bank’s own manufacturing PMI fell to 42.4 in May, indicating a contraction in the sector for the first time after positive readings over 36 consecutive months. The manufacturing PMI compiled by Lagos-based FBNQuest Capital fell to 43.3 in May from 45.8, with all sub-indices falling as well.

“The May PMI continues to suggest a deep contraction in growth. Even though easing lockdowns have slowed the rate of decline, the economy remains firmly in contraction territory for now. With business confidence still weak, this is likely to persist –resulting in an overall contraction for the year. This is at odds with the CBNs expectation. Although they have announced a number of stimulus measures, exchange rate restrictions continue to weigh on growth. They also continue to stoke inflation.”

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