Ahead of an official release of Nigeria’s economic performance in the second quarter of 2017, the trend in the country’s Purchasing Managers’ Index (PMI) during the period may have leaked clues of only the first quarterly GDP growth since 2015.
PMIs are leading indicators of business sentiment and have demonstrated a strong correlation with GDP growth, as is the case with Nigeria and other countries. It helps investors make predictions on economic growth.
Nigeria’s PMI had flashed signals of an economic downturn in the first quarter of 2016 before an official GDP report went on to confirm the slump.
It may now be flashing yet another signal.
The average manufacturing and non-manufacturing PMI in the months that make up the second quarter (April, May and June) was 52.1 points, as deduced from data provided by the Central Bank of Nigeria (CBN) data.
Manufacturing PMI rose for the third consecutive month to 52.9 index points in the most recent month, being June 2017, while non-manufacturing PMI was 54.2 index points in the period under review, the second consecutive monthly rise.
Readings above 50 are indicators of increasing activity and tend to precede Nigeria’s GDP growth, according to a trend analysis computed by Financial Quest.
An official report by government-funded statistics agency, the National Bureau of Statistics (NBS) is due August 23.
“The improvement we have seen in the last three months in PMI is a lukewarm reaction that the economy is starting to grow again,” said Kyari Bukar, chairman of private sector think-tank, the Nigerian Economic Summit Group (NESG), which draws membership across all sectors that make up the economy.
“If we didn’t record growth in the second quarter, then we probably did in the third,” Bukar said by phone, adding that improved dollar supply and rising crude oil production are also indications that the country may have exited recession.
“Although economic growth below 10 percent is not as rosy, given our teeming population, positive growth is at least a good development,” Bukar said.
Nigeria’s economy, which vies with South Africa’s to be the continent’s largest, is amid its first recession in a quarter of a century, after a plunge in global oil prices and militant attacks on energy facilities (which sent production to decade lows) along with acute dollar and fuel shortages to cripple economic activity.
Although the economy proved too weak to fight off the fifth consecutive quarter of contraction in Q1, following a 0.5 percent decline, analysts forecast marginal growth in the second quarter in line with the PMI trend.
The median estimate of 14 economists polled in a Financial Quest survey is for a 0.4 percent GDP growth in Q2.
“The month of June 2017 is not only symbolic for heralding the summer season, but is significant as it is likely to mark the end of the recession, said Bismarck Rewane, CEO of Lagos-based advisory services firm, Financial Derivatives Company (FDC).
Rewane forecasts a 0.5 percent growth in the second quarter.
“It is heartening to see oil production back up to 2mbpd and the convergence in the exchange rate at the parallel market and the investor exporter window (N368/$).
“This means that slowly but surely the economy may be moving closer to a dynamic equilibrium and we should be expecting a deluge of domestic and international investors,” Rewane said in the company’s monthly publication for June.
Improving oil prices and a relative calm in the Niger-Delta area have helped boost optimism of a recovery this year, although growth projections are so underwhelming they would elude the country’s 180 million people.
The International Monetary Fund (IMF) tips the economy to expand by 0.8 percent in 2017, as oil prices and output recovers.
“In our view, the economy is emerging from recession,” said Gregory Kronsten and Chinwe Egwim, fixed income analysts at Lagos-based investment firm, FBNQuest.
“We see a recovery in GDP growth to 1.6 percent in the second quarter” of this year, Kronsten and Egwim said.
FBNQuest, which also compiles its own PMI, said the index jumped to 55.9 points in June from 54.0 the previous month, taking the tally to four straight months of readings above 50.
Oil prices averaged over $50 per barrel in the first half of 2017, from $38 in 2016, while Nigeria’s production volumes have gradually crept above the 2 million barrels daily mark, from as low as 1.2 million bd last year.
This has spurred optimism that the oil sector’s contraction over the last two years would ease in Q2 and a recovery may be on the cards by the third quarter.
Meanwhile, the CBN has stepped up its sales of fx to importers, SMEs and retail (for invisibles) since March.
It has also created a new window meant to serve Investors and Exporters (NAFEX), which it says the rates are market determined.
These steps have eased some pressure off the naira and led to a 20 percent appreciation year-to-date. The NAFEX closed at N365.66 per US dollar on Thursday, while the NIFEX closed at N325 per US dollar, according to data by trading platform, FMDQ OTC.
The oil sector accounts for only 10 percent of GDP, compared to Agriculture which accounts for 25 percent, but structural imbalances make the former the single largest contributor to Nigeria’s economy which thrives on petrodollars.
In the first three months of 2017, the oil sector recorded a negative growth of 11.64 percent, according to the National Bureau of Statistics (NBS). Compared to Q4 2016, the sector grew by 14.86 percent.
Meanwhile, the non-oil sector exited the negative growth region, growing by 0.72 percent y/y in Q1-2017 (compared to -0.33% y/y in Q4-2016 and -0.18% y/y in the corresponding quarter of 2016) supported by activities in agriculture, manufacturing, information and communication, transportation, and other services.
Given its teeming population, the economy needs to grow in the region of 7 percent otherwise an economic rebound would elude the citizens.