PMI reading no 44: back below water

Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a decline from 52.9 in October to 48.8. Our partner, NOI Polls, has gathered and compiled the data. The index update is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses. 
PMIs are forward-looking indicators of sentiment, and have the proven capacity to move financial markets. 

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A reading of 50 is neutral. We have posted eight negative headline readings since our launch in April 2013 including five this year alone. This is to be expected since Nigeria has entered a recession. 

Our sample is an accurate blend of large, medium-sized and small companies. 

We have also added “trigger” questions, which apply when the respondent has the same answer on a sub-index for two successive months and then changes it for the third. 

Unusually, all five sub-indices deteriorated in November. The return of the headline reading to negative territory is consistent with statistical and anecdotal evidence. The contraction of manufacturing picked up from -3.4% to -4.4% y/y in Q3 2016.

Different factors are at play. The food, beverages and tobacco segment has a high import requirement and contracted by -5.8% y/y. The cement industry uses limited imported inputs in its production and contracted by -6.3% y/y in Q3. We should add the squeeze in demand and the fall-off in capital projects to the acute fx shortage in our list of drivers of shrinking output.

For GDP we see a return to growth of 0.6% y/y in Q4 (from -2.2%) on the back of a modest seasonal boost to household demand as well as positive base effects for the oil sector. The figure could look rather better if the oil economy surprises on the upside 

Demand is set to benefit from the FGN’s expansionary fiscal stance. Manufacturing, however, will likely be one of the last non-oil sectors to recover on account of the fx constraint.

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