PMI reading no 48: fx influence for the good

Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a modest increase from 50.0 in February to 52.8. 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.

Four of the five sub-indices picked up in February. Among the answers to the trigger questions, we note a common theme of naira appreciation and a resulting improvement in supplies of raw materials.

This appreciation on the parallel market has been the direct result of the CBN’s measures in late February to improve fx liquidity for retail (for invisibles) and for importers. The recovery in the headline reading is not dramatic and we are not sure whether the appreciation has further legs to run. Yet we have to acknowledge the impact of the measures on at least part of the manufacturing sector.

According to our narrative, the economy is emerging from recession. In Q4 2016, the contraction of the economy narrowed from -2.2% y/y the previous quarter to -1.3%, and that of manufacturing from -4.4% y/y to -2.5%.

The expansionary fiscal stance is set to be the leading driver of the recovery. The turnaround in the private sector will be gradual: our reading for employment was again negative in March (49) and has moved within a range of 42 to 52 since January 2016.

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