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PMI Reading No 94: Familiar Seasonal Low in January 2021

Nigeria Economy	1323 VIEWS
Nigeria Economy
1323 VIEWS

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Monday, February 01, 2021 / 09:53AM / by FBNQuest Research/ Header Image Credit: Ditto Trade

Our manufacturing Purchasing Managers' Index (PMI), the first in Nigeria, declined sharply from 55.0 to 44.5 in January. Our partner, NOI Polls, collects the data. An index is produced in advanced economies such as by the Institute for Supply Management (ISM) in the US, larger EMs such as Brazil, China and Russia, and a good number of other frontier markets. It is based upon manufacturers'[ responses to set questions on core variables in their businesses. In our case, it is not seasonally adjusted.

Our highest reading to date has been 68.7 in December 2017 and our lowest 43.3 during lockdown in May 2020. In our unweighted model (that of the ISM), respondents are asked whether output, employment, new orders, suppliers' delivery times and stocks of purchases have increased over the previous month, are flat or have declined. A reading over 50 (ex 100) indicates manufacturing expansion.

PMIs, unlike the national accounts, are forward-looking indicators. They can move financial markets, at least in advanced economies and the large EMs.

Covid-19 has created some marked swings. Our own index rose by 10.3 points in June as the economy emerged from the selective lockdown.

Without seasonal adjustment, we always see a decline in the January reading as the country changes its spending patterns after the holiday period. This is our third decline in double-digits for January since we launched in 2013 and the third largest. It appears that these declines have become larger in recent years of economic stagnation (and recession). Our tentative explanation is that many Nigerians have celebrated the Christmas holiday with their usual energy and that the retrenchment in January has become necessarily deeper.

This is borne out by one of the answers to our trigger questions. Respondents indicated that a sharp decline in output reflected a slower start to production in January in view of weak demand conditions.

Other answers observed that raw materials had become scarce and more expensive. Fx has not been freely available since Q1 '20 (pre-Covid, essentially) and importers have to consider the parallel market for their needs.

These questions arise when a respondent has given the same answer on a sub-index for two successive months and then changes it for the third.

Another trend across the readings in January is that, while medium-sized and small companies reported deterioration for all sub-indices, large operations noted minimal change from the previous month. It may be that these firms have a more steady customer base and did not suffer a prominent fall-off in new orders (and therefore output) in January. They are more confident of repeat orders.

The reading for employment was again below water, at 49. Since GDP per head has not been positive since Q3 '15, business has naturally been reluctant to hire additional labour. According to the National Bureau for Statistics, the unemployment rate in Q2 '20 was 27.1% and the underemployment rate a further 28.6%.

The most common response in our surveys is 'no change'. The proportion has declined in line with the trend for medium-sized and small operations already noted. Yet it still accounted for more than 40% of responses for all five sub-indices. In employment, it again exceeded 90%.

On a 12-month moving average basis, the headline index eased from 51.4 to 50.7.

There has been no common pattern in headline readings in February. Our hunch is that we will see a modest improvement off a particularly low January.