November 2017; lower but still healthy
- Considerable decrease in November to 60.1 for headline
- All five sub-indices in positive territory
- Highest for output
- Lowest for workforce
We release today the latest reading (no 56) of our manufacturing Purchasing Managers’ Index (PMI) for Nigeria, which takes the temperature of the sector. Our PMI was the first in Nigeria. It has developed into a core forward indicator.
A PMI is a simple exercise. A selection of companies are asked their view each month on core variables in their business. The respondent, who is characteristically the purchasing manager in a larger firm, has three possible replies: better, unchanged or worse than the previous month. According to the standard methodology, 50 marks a neutral reading and anything higher suggests that the manufacturing economy is expanding. Readings are released at the very beginning of the new month, subject to public holidays.
In our case, the five variables are output, employment, new orders, delivery times from suppliers and stocks of purchases. They have equal weightings in our index. Our reports cover a representative sample of the sector with large, medium-sized and small firms. Any broad economic conclusions on the basis of our reports need to be tentative because we are operating in a near statistical void.
The national accounts, unlike a PMI, are a historical indicator. The latest series (for Q3 2017) shows an acceleration in growth from an upwardly revised 0.7% in the previous quarter to 1.4% y/y. Oil GDP grew by 25.9% y/y and 21.1% q/q, which mirrors the improved stability in the Niger Delta. For the non-oil economy, the data show y/y contraction of -0.8% and q/q expansion of 7.8%. On the basis of q/q GDP data, we can track correlation with our monthly PMI readings. Manufacturing achieved growth of 2.6% q/q in Q3 2017. Food, beverages and tobacco, its largest segment, grew by 0.6% q/q. Meanwhile, textiles, apparel and footwear achieved close to 8% q/q. Investment in backward integration, support for cotton growers from state governments and fx availability for machinery could all have played a part.
The headline reading retreated from 64.8 to 60.1 in November. Although a reversal, it remains comfortably above water. There was a decline across all sub-indices. While there has been a transformation in the access to fx this year due to the CBN’s multiple currency practices (MCP), some manufacturers still face the challenge of the increased cost of imported inputs. Local substitution remains a solution over time: however, for now the agro-processing segment seems to be the main practitioner.
We assume the headline reading will remain well above 50 in December. However, we do not underestimate the impact of the recent recession on consumer pockets. We also note that January has brought a fall in the headline, sometimes sharp, each year since the launch of our index.