Global economic growth decelerated for the second consecutive year in 2016 as emerging economies continued to grapple with the impact of commodity price shocks to their external accounts and growth across developed economies remained largely sub-par. Though growth picked up in the US and Japan in the second half of the year, subsisting political concerns, particularly Brexit, weighed on economic activities across Europe. In response, global central banks responded to the lacklustre growth with increased monetary stimulus which pushed yields across developed world close to record lows for a sizable part of the year.
However, the emergence of Donald Trump as the US President elect and rising voter backlash against globalization ensured FPI flows to EM fell to its lowest in eight years even as US bond yields rose. Closer to home, growth in SSA economies more than the broader EM class stagnated which resulted in IMF’s downgrade of its 2016 growth forecast for the region to a 20-year low of 1.4% YoY. Unsurprisingly, the current account pressures fed sizable exchange rate weakness and by extension rising inflation. The dour economic landscape in SSA largely mirrored activities in the continent’s biggest economy, Nigeria, where GDP contracted over the three quarters of 2016—first of its kind in 25 years—inflation printed at an eleven-year summit, unemployment surged to a record high of 13.9% in Q3 16, while negative trade balance over the last thirteen months is the longest on record.
Output weakness stemmed from both the oil and non-oil sectors with contraction in the latter reflecting cutback in government spending (states and FG), negative real wage growth of consumers, FX supply challenges and factory downtime from incessant disruptions to gas supply. With regards to oil, persisting militant attacks on oil installations ensured the country’s oil production fell to multi-decade lows of 1.5mbpd in Q3 16 which together with lower oil prices underpinned the fastest pace of oil GDP contraction in 48 years in Q3 16. Events at the oil sector were also instrumental in perpetuating the deficit in the trade balance while it’s knock-down effect on FX reserves induced further currency depreciation in H2 16, making the naira one of the worst currency performers in the world. Predictably, impact of naira depreciation reverberated to headline inflation as increased cross border exports and import substitution by domestic manufacturers weighed on domestic supply of food.