PMI Reading Sustains Uptrend

The Central Bank of Nigeria (CBN), last Wednesday, released the Purchasing Manager’s Index (PMI) for July, with data showing an expansion in manufacturing activity for the fourth consecutive month while non-manufacturing sector growth entered the third month. The sustained development in PMI readings since the turn of the second Quarter coincides with the period the economy is recording improvements in FX liquidity and fiscal spending following rebound in oil earnings and external reserves, which are attributable to largely stable oil prices and rebound in production volumes as well as increased flexibility in the CBN’s FX policy.

July’s manufacturing PMI expanded from 52.9 points in June 2017 to 54.1 points in July – the highest level since the CBN started the data series in 2014. The major drivers of the expansion were Production Level (59.3 points), New Orders (52.7 points), Supply Delivery Time (51.3 points), Employment level (51.8 points) and Raw Materials Inventory (53.6 points) sub-indices which grew 1.1ppts, 1.7ppts, 1.0ppt, 0.7ppt and 1.3ppts respectively. The outcome of the enhancement in business sentiment was evident in ten of sixteen subsectors which recorded growth in the period. Appliances & components, computer & electronic products, cement, primary metal, chemical & pharmaceutical products, food, beverage & tobacco products, textile, apparel, leather & footwear, printing & related support activities, paper products, electrical equipment and transportation equipment all expanded while petroleum & coal products, fabricated metal product, furniture & related products, non-metallic mineral products and plastics & rubber products declined.

Likewise, the Non-manufacturing PMI rose to 54.4points (compared to 54.2points in June 2017) after two consecutive months of progress. The Composite index was buoyed by increases in Business Activity (56.8 points), New Orders (55.1 points), Employment level (54.0 points) and Inventory (51.9 points). Accordingly, of the eighteen non-manufacturing subsectors, sixteen recorded growth.

A composite PMI above 50 points indicates that the manufacturing/non-manufacturing economy is generally expanding, 50 points indicates no change and below 50 points indicates that it is generally contracting. The positive trend reveals optimistic perception of manufacturers and business owners for the second half of the year on account of FX market flexibility and stability in cyclical anchors of the business cycle - oil production and prices - as well as economic development plans of the federal government; thus, further reaffirming our positive outlook for growth in 2017 (+0.8% FY:2017 growth forecast). Nonetheless, we note that GDP growth below 3.0% will have little impact on quality of life in Nigeria as per capital income growth is likely to remain negative; hence, the need for more constructive policymaking to address structural constraints to high and sustainable growth – high interest rate, FX market distortion and low investment spending.