Nigeria Economy | |
Nigeria Economy | |
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Monday, December 04, 2017 / 1:15 PM
/Vetiva Research
The
CBN released Nigeria’s Purchasing Managers’ Index (PMI) for the month of
November with both manufacturing (55.0 to 55.9), and non-manufacturing (55.3 to
57.6) sectors expanding at a quicker pace.
Much
stronger readings in November
The
manufacturing sector expanded at a record pace in November as all five
sub-indices accelerated during the month. Notably, employment levels (October:
53.1, November: 53.7) continued to rise at a quicker pace, pointing to a sturdy
improvement in labor market conditions in recent times – unemployment rate last
recorded at 14.2% at the end of 2016.
However,
survey responses indicate that export demand remains soft (37.6) whilst the
inflationary environment continues to pressure input (64.3) and output (54.0)
prices.
At
57.6, non-Manufacturing PMI was by far the highest in 2017 (previous: 55.3 in
October), suggesting a marked month-on-month improvement in the broader
services sector of the economy.
Similar
to the manufacturing sector, all four sub-indices expanded at a faster pace,
led by Business Activity (57.5 to 59.4) and New Orders (55.7 to 58.4) –
pointing to strengthening aggregate demand. Once again, Agriculture (64.6 to
78.3) was a significant mover, closely followed by Utilities (62.5 to 73.8) and
Finance & Insurance (60.1 to 62.0).
Key
feature: Weak Q3 GDP puts spotlight on PMI
Despite
very strong Q3’17 PMI figures across both manufacturing (average: 54.3) and
non-manufacturing (54.5) sectors, economic growth in the third quarter was
solely driven by a recovery in oil production (Oil sector GDP: 25.4% y/y) as
the non-oil sector actually contracted 0.8% y/y. Drilling down, the
manufacturing sector shrank 2.9% y/y and services shrank 2.4% y/y.
This
divergence between hard and soft data is not unique to Nigeria and follows a
recent global trend. In the United Kingdom, post-Brexit confidence indicators
slumped and have remained relatively low despite the economy proving
comparatively resilient in the last eighteen months. Meanwhile, strong consumer
and business confidence in the United States has failed to translate to
materially higher economic growth.
Understanding
the limitations of PMI and similar soft data sheds light on the potential
reasons for this divergence. PMI readings in Nigeria are a barometer of
business sentiment, and actual output may sometimes lag changes in sentiment.
Alternatively, sentiment could be driven by other factors; for example,
stronger expressions of business confidence in the U.S. have been linked with
partisanship.
All
in all, leading indicators such as PMI remain very useful gauges of economic
pulse despite their limitations, and can sometimes pinpoint the precise drag on
the economy. In Nigeria's case, with business sentiment stronger for most of
2017, sluggish non-oil GDP recovery could be driven by softer consumer demand
which would not be picked up as cleanly by PMI surveys.
Brighter
2018 outlook
The
seasonal boost should drive another strong PMI reading in December. Although we
expect Q4’17 GDP to come in positive, we adopt a cautious stance amidst
underlying consumer weakness and forecast growth of 1.0% y/y (2017E: 0.6% y/y).
Our outlook for 2018 is much brighter, supported by receding inflation and
likely monetary stimulus, continued stability in the foreign exchange market,
and improvements in consumer spending power and aggregate demand. We forecast
GDP growth of 2.0% y/y.
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2.
Manufacturing PMI Stands at 55.9% in November 2017 from
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3.
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