July 2016 PMI is Slightly Above Water


Monday, August 01, 2016 11:21am/ FBNQuest Research

Main conclusions

·       Pick-up in July headline to 51.0

·       Three sub-indices in positive territory

·       Highest for delivery times

·       Lowest for output 


We release today the latest reading (no 40) 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 become a core forward indicator for analysts, policymakers and financial market players.   

A PMI is a simple exercise. A selection of companies is 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 choices of reply: better, unchanged or worse than the previous month. According to the most used 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.

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.

In Q1 2016 GDP contracted at constant basic prices by -0.4% y/y, the worst figure since 2011 in the new national accounts. The oil and non-oil sectors contracted by -1.9% y/y and -0.2% y/y respectively. Declines in manufacturing, financial institutions and real estate dragged the non-oil sector down. The manufacturing sector contracted by -7.0% y/y in Q1, compared with growth of 0.4% the previous quarter. 

Our latest headline reading shows a pick-up from 50.2 posted the previous month. The modest uptick in the headline reading observed in both June and July suggests that manufacturing has risen off the floor and, possibly, that GDP numbers for Q3 will be less depressing than those for the second quarter (due later this month).

We also suspect that the slight improvement reflects a rise in domestic input utilisation by respondents, particularly in food, beverages and textile focused companies. From the trigger questions, we find companies reporting increases in their output, workforce and stocks of purchases due to improved customer patronage.

Some companies tell the opposite story, of course, but we are encouraged that both narratives are being told. Our take is that the sector is settling on a plateau.

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