PMI Reading No 99: Back Below Water

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Thursday, July 01, 2021 / 09:18 AM / by FBNQuest Research / Header Image Credit:  FBNQuest 

 

Our manufacturing Purchasing Managers' Index (PMI) declined from 51.1 to 48.8 in June, returning to negative territory for the first time since January. It was the first of its kind in Nigeria. Readings for three of the five sub-indices fell in the month, and a fourth was flat. 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 China, India, and Russia, and a good number of emerging/frontier markets. It is based upon manufacturers' responses to set questions on core variables in their businesses. Our highest reading to date has been 68.7 in December '17 and our lowest 43.3 during selective lockdown in May '20. 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 fallen. A headline reading over 50 (ex 100) indicates expansion.

 

On a 12-month moving average basis, the headline index weakened from 52.3 to 51.9 in June.

 

PMIs, unlike the national accounts, are forward-looking indicators. Neither in Nigeria is seasonally adjusted. The indices are now running three months ahead of the accounts, the latest of which covers Q1 '21. They move markets in advanced economies, which was evident during the lockdown and the recovery from it across jurisdictions in H1 '20.

 

The FGN has set a target of a 20% manufacturing share of GDP by 2023. This is ambitious, the latest figure being 12.8% in 2020 at current prices. The aspiration is drawn, we assume, from East Asian success stories. In this model commercial agriculture provides the raw materials for a wide range of manufacturing goods, which would explain why the federal industry ministry plans to finalise strategies for oil palm, and clothing and textiles later this year.

 

Manufacturing may have supplanted retail trade and become the second-largest sector in the economy in Q1. However, it is far from creating what we will term an Asian multiplier impact on wealth and employment. It is broadly producing consumer goods for a large population that is growing at a decent rate. Those segments in heavy industry contribute little overall: oil refining; basic metal, iron and steel; and if we are being charitable, motor vehicles and assembly.

 

The NOI surveys involve trigger questions, which are put to respondents when they have given the same answer on a sub-index for two successive months and changed it for the third.  The common negative themes in this survey are the rainy season, and the scarcity and high cost of raw materials. We would add the steady erosion of household budgets over six years as well as the poor hard infrastructure.  

 

The most popular answer in our surveys is 'no change', accounting for over 50% of responses for all sub-indices. In employment and suppliers' delivery times, its share exceeded 80%.

 

The best performing sub-sector during life with COVID has been cement. Other than the quarter of lockdown (Q2 '20), it has shown resilience. Its contribution to manufacturing GDP at current prices has increased to 21.1% of the total in Q1 '21 from 18.6% one year previously. The principal loser over the 12 months appears to have been textiles, apparel, and footwear as a result of deteriorating access to fx and therefore imported raw materials.

 

The main inputs for cement production, in contrast, can be found locally. Additionally, the FGN has an ambitious agenda for capital spending: even when we allow for the regular budget adjustments to rein in such expenditure on account of revenue shortfalls, we still have a solid base for rising cement demand. Listed producers announced healthy sales growth in Q1 '21.

 

China's manufacturing PMI (the official series) weakened marginally from 51.0 to 50.9 in June. Challenges in accessing core inputs for production were largely to blame.

 

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