Unravelling the NBS Q2 2021 GDP Report Puzzle, By Uche Uwaleke

To many close watchers of the Nigerian economy, the recently published National Bureau of Statistics second quarter GDP report was an upside surprise; to some others, it was confounding to say the least.

In it, the NBS had disclosed that ‘Nigeria’s Gross Domestic Product (GDP) grew by 5.01% (year-on-year) in real terms in the second quarter of 2021, marking three consecutive quarters of growth following the negative growth rates recorded in the second and third quarters of 2020’.

While the surprise element is the unexpected and quantum leap from a weak 0.51% recorded in the previous quarter to over 5% in Q2 of 2021, the confusion stems from two seemingly contrasting statements in the report.

▪︎The Puzzle

In one paragraph, the report stated that ‘the Q2 2021 growth rate was higher than the -6.10% growth rate recorded in Q2 2020 and the 0.51% recorded in Q1 2021 year on year, indicating the return of business and economic activity near levels seen prior to the nationwide implementation of COVID-19 related restrictions’.

In another paragraph, it admitted that ‘nevertheless, quarter on quarter, real GDP grew at -0.79% in Q2 2021 compared to Q1 2021, reflecting slightly slower economic activity than the preceding quarter due largely to seasonality’. In other words, real GDP growth rate in Q2 2021 rose year-on-year but actually fell on a quarter-on-quarter basis- herein lays the puzzle.

Little wonder the Vanguard Newspaper of Friday August 27 2021 had a front page story titled ‘GDP rises 5% YoY, declines 0.8% QoQ’. What does one make of this seeming antithesis? The answer can be found in what is generally termed the ‘base effect’.

▪︎Making sense of “Base Effect”

To be sure, the base effect arises whenever a current data point or point of interest is expressed as a percentage of another data point or base. Expectedly, comparisons using different base values will produce varying results. In line with International standards outlined under the United Nations Statistics Division (UNSTATS), the NBS computes GDP as ‘gross output minus intermediate consumption’. This data is provided on a year-on-year basis as well as quarter-on-quarter basis.  The base effect, also applicable with respect to computation of inflation rates, relates to GDP in the corresponding period of the previous quarter or year. If the growth rate was too low in the corresponding period, other factors remaining same, it is likely that the current rate will be high and vice versa.

This is partly the reason frontier and emerging economies record higher GDP growth rates than developed economies. Take the case of Indonesia for example, in the second quarter of 2021, the country is reported to have pulled out of economic recession with a very strong GDP growth rate of 7.07% which was the strongest in 17 years attributed in part to base effect. It is also why war-ravaged economies appear to grow faster than stable economies following cessation of hostilities.

▪︎Spotting Base effect in NBS Q2 2021 GDP Numbers

It is easy to spot the base effect in the Q2 2021 GDP numbers released by the NBS. The year 2020 recorded real GDP quarterly growth rates of 1.87%, -6.10%, -3.62% and 0.11% for the first, second, third and fourth quarter periods respectively. The second quarter of 2020 witnessed the deepest contraction in economic activity in 2020 with real GDP growth rate of -6.01% year-on-year. This quarter also had the least number of economic activities recording positive growth. So, as the Nigerian economy gradually recovers, the dramatic decline in Q2 of 2020 becomes the starting point for calculating 12-month growth rates giving rise to base effect in the 2021 Q2 numbers.

It is pertinent to note that the impressive Q2 2021 real GDP growth was recorded despite drop in average daily oil output from the previous quarter. Essentially growth was powered by the non-oil sector. The high performers include Transport (76.81%), Trade (22.49%) and Information & Telecom (5.55%)