Productive Activity Contracts More Slowly in July


Tuesday, August 09, 2016 8:32am /Vetiva Research

July PMI figures decline at a lower pace
Following a second quarter of likely output contraction, the Nigerian economy began the third quarter on a negative note as productive activity declined further in July, albeit at a slower pace, with CBN Manufacturing PMI at 44.1 (June: 41.9) and Non-manufacturing PMI at 43.2 (June: 42.3) – both still below the 50 threshold that signals no change in the level of business activity from the previous month.

The increase in Manufacturing PMI was largely driven by a slower rate of decline in all sub-indexes, save for supplier delivery time which rose at a slower pace. We attribute this fifth successive month of improvement in Supplier Delivery time to smoother transport since the liberalization of PMS prices. All Non-manufacturing sub-indexes declined in July although there was a slight improvement in business activity and new orders as demand rebounded from June lows.

All but one of the Manufacturing sub-sectors contracted further this month, although many contracted at a slower pace. The exception was the Computer & Electronics sub-sector which recorded strong growth, reflected in higher employment levels in the sub-sector. Meanwhile, the Primary Metals sub-sector declined substantially on the back of lower production levels and new orders.

The Non-manufacturing Business Activity sub-index increased as firms ran down raw material inventories at a faster pace in the wake of slightly more resilient demand. Imports declined more steeply in July as the weaker naira continues to depress import demand (July Average Interbank FX rate: NGN298/USD).

As a result, Agriculture expanded at a faster pace in July, benefiting from increased local patronage. Input and output prices continue to rise as cost-push inflationary pressures persisted.

Key feature: Employment shrinks further
The challenging economic climate continued to weigh on labour demand as employment levels shrank further in July.

This was most evident in Non-manufacturing as employment fell across all sub-sectors with Construction (14 months) and Education (4 months) continuing their contracting streak as Government employment initiatives in these areas are yet to gain traction.

With manufacturing employment also shrinking, the near term outlook for the labour market remains broadly negative.

Harsher monetary environment to further pressure business activity
The slight improvement in July PMI points towards green shoots in the economy but business sentiment remains weak following a raft of reforms including petroleum downstream deregulation, electricity tariff increase, and FX market liberalization that have increased costs and depressed consumer demand.

We therefore expect productive activity to be constrained amidst a tighter monetary environment before the effects of fiscal stimulus begin to take hold.

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