PMI reading no 47: neutral

Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a modest increase from 48.6 in January to 50.0. Our partner, NOI Polls, has gathered and compiled the data. The index report 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 developed economies.

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, suppliers’ 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 nine negative headline readings since our launch in April 2013 including five in 2016.

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. Additionally for this month’s report, respondents were asked to name the main constraints upon their businesses. As well as the predictable answers about credit and fx, we note the mention of multiple taxation, poor roads and late payment by clients.

Four of the five sub-indices picked up in February. Other than the habitual festive boost at the end of the year, the headline index has moved within a fairly narrow range since November.

This is only our second neutral reading (after April 2014). It is consistent with our narrative that the economy is emerging from recession. While the output of the non-oil economy deteriorated in Q4 2016, the contraction of manufacturing did slow from -4.4% y/y to -2.5%.

We are not calling a dramatic turnaround in the economy although we see modest growth in Q1 2017. Manufacturing is one of the principal losers from the scarcity of fx despite some movement towards import substitution.

Demand is set to benefit from the FGN’s expansionary fiscal stance, particularly from the pick-up in capital releases. Manufacturing, however, will likely be one of the last non-oil sectors to recover due to the scarcity.

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