Q1 2023: Global and Domestic macroeconomic review

GLOBAL MACROS

The first quarter of 2023 witnessed a mixed performance in the global economy as countries continued to grapple with the ongoing challenges posed by the COVID-19 pandemic. While some regions experienced signs of recovery and growth, others faced persistent obstacles hindering their economic progress. Vaccination progress, government policies, and supply chain disruptions were key factors influencing macroeconomic conditions. Inflationary pressures and the normalization of monetary policies emerged as important areas of concern.

To begin with, global economic growth showed signs of improvement in Q1 2023, albeit at a varying pace across regions. Developed economies, such as the United States and Europe, experienced a rebound in economic activity, driven by successful vaccination campaigns, fiscal stimulus initiatives, and the gradual reopening of businesses. Emerging markets, on the other hand, faced more significant challenges due to slower vaccine rollouts, limited fiscal support, and ongoing uncertainties.

During this period, global trade faced persistent challenges due to ongoing supply chain disruptions caused by the pandemic. Issues such as container shortages, labor shortages, and transportation bottlenecks continued to impact international trade flows. These disruptions affected various industries, including manufacturing, retail, and automotive sectors, leading to higher input costs and delays in production.

Now to Monetary policy, central banks around the world continued to adopt accommodative monetary policies in Q1 2023, although some began signaling a shift toward normalization. The U.S. Federal Reserve hinted at potential interest rate hikes to address inflationary pressures, as Fed expressed confidence in the resilience of the US banking system and raised the policy rate by 25 basis points in both February and March. while the European Central Bank and the Bank of Japan maintained their supportive stance. The divergence in monetary policies among major economies could lead to volatility in global financial markets.

Investor optimism drove US stocks up over the quarter despite the brief market turmoil that followed the failure of Silicon Valley Bank (SVB) in March. Rates were increased twice by the Federal Reserve (Fed), and data showed that inflation was slowing, raising hopes that the cycle of rate increases would soon come to a stop. Stocks fell significantly in March as a result of the collapse of SVB, which was swiftly followed by additional financial sector disruption in Europe. However, they soon recovered to close the month and the quarter higher.

Away from MPC, one of the major concerns during Q1 2023 was the surge in inflationary pressures observed in several countries. Rising commodity prices, supply chain disruptions, and increased demand contributed to higher inflation rates. Central banks in many nations responded by considering or implementing tighter monetary policies to curb inflation and maintain price stability.

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DOMESTIC MACROS

The first quarter of 2023 was rather interesting, as we saw a Q4-22 GDP that was greater than anticipated, unexpected MPC moves and inflation rates. A highly anticipated general election was also held in February, and the ongoing currency crisis and fuel shortage are aggravating Nigeria's cost of living crisis.

Nigeria’s economy grew by 3.52% in Q4'22, up from 2.25% growth in Q3'22, this brought the annual growth rate of the country to 3.10%. However, despite the significant growth in the country’s Q4'22 GDP, it was still 0.46% lower than the 3.98% recorded in Q4’21 supported by contractions in both the industrial sector (-0.94%) and the oil sector (-13.38%). Decomposing the breakdown, the oil sector, Nigeria’s top source of export revenue, witnessed a slowdown in its growth due to large-scale crude theft and pipeline vandalism. In Q4’22, the sector continued its downward trend, -13.38% from -22.67% in the previous quarter. However, the non-oil sector reflected gains in the service sector, with impressive 4G and 5G network coverage.

During this period, we witnessed the much-awaited presidential elections that were held on the 25th of February 2023. A thrilling and highly contested election, with the longest campaign time in Nigeria’s short history, ended at 4 pm on Wednesday 1st March. Bola Tinubu was declared the winner, having won 8.79 million votes out of 24.96mn, while PDP's Atiku (6.98 million) and Labour Party’s Obi (6.10 million) came in at second and third, respectively. Violence, thuggery, and ballot box stealing tainted the election, with 29.07% of voters turning out for the election. The election results are being challenged in Court by the three leading opposition parties, however, most observers have judged the election results to be below expectations.

Away from election matters, the monetary policy committee (MPC), in its March meeting, hiked rates by 50 bps to 18.00% from 17.50% (January) —the highest rate since the MPC began in 2006, and since May 2022. The critical considerations during the meeting include the global financial tremor (caused by a series of bank failures such as Silicon Valley Bank, Credit Suisse, and Signature Bank), inflation, the unintended consequences of the cash crunch, GDP growth, and exchange rate pressures. More importantly, the increase in interest rates was a precautionary move to anchor inflation expectations ahead of the fuel subsidy removal in H2’23.

Now to inflation, the ever-rising inflation rate continues on a higher note as we witnessed in the first quarter, the National Bureau of Statistics (NBS) released the March 2023 inflation report, showing that the headline inflation increased by 13bps to 22.04% y/y (February: 21.91% y/y) – the highest print since September 2005 (24.32% y/y). The uptick in March’s inflation was due to increases in prices of both food and non-food items as the reinfusion of the old naira notes improved consumer demand. Similarly, month-on-month inflation (which measures the current price movements) rose by 0.15%. Parsing the breakdown provided, food inflation resumed an uptrend, rising by 16bps to 2.07% m/m due to below-historical average cultivation activities limiting food supply. On a y/y basis, food inflation rose to its highest level since October 2005 (24.56% y/y) settling at 24.45% y/y (February: 4.35% y/y). Elsewhere, the core inflation increased on a y/y basis, to its highest level since May 2004, increasing by 102bps to 19.86%.

Nigeria experienced cash and fuel shortages in the first quarter of 2023, which reduced consumers' disposable income. The pump price of petrol at most filling stations rose by 112.12% to ₦350/liter from ₦165/liter, while the black marketers had a field day raising prices to as high as ₦600/liter. Fuel scarcity has been occurring since October 2022. In addition, diesel prices remain elevated at ₦817/liter. The lingering energy crisis has translated to a spike in average transport costs of over 40% compared to a year ago. At the end of the first quarter, CBN released a data report showing that currency-in-circulation in the Nigerian economy stood at ₦1.6trillion. The policy was introduced in October 2022 but took effect in December 2022. It aimed to curb inflation, reduce counterfeiting and hoarding, stop vote buying, and reduce kidnapping activities.

The cash swap policy successfully mopped up ₦2.33 trillion from the total currency-in-circulation as of October ((₦3.29trn), contributing to the monthly inflation's fall. However, it resulted in a cash scarcity, while queues surfaced at cash points across the country, and ATM and POS operators had a field day charging ridiculous transaction prices. More noteworthy is the surge in transactions through e-payment channels, particularly POS. In February, the value of POS transactions rose by 9.45% to ₦883.45bn from ₦807.16bn in the previous month. Nonetheless, it is not surprising because of the internet issues and transaction delays experienced by bank customers during the month. The increased adoption of the digital payment method indicates that the CBN’s cashless policy is underway.

However, the poor implementation was more detrimental to the economy than beneficial. Productivity dropped due to the double whammy of cash scarcity and fuel shortage. Businesses also saw a decline in their sales and profit levels as weak consumer demand forced them to cut prices and reduce output. The good news is that the CBN has instructed banks to adhere to the Supreme Court’s order to extend the validity of old naira notes till Dec 31st, 2023. This will have a positive impact on consumer demand and productivity levels.

FIND ABOVE DOWNLOADABLE Q1 2023 NEWSLETTER REPORT