September 2016 PMI is Back in Negative Territory


Tuesday, October 04, 2016 9:34am / FBNQuest Research

Main conclusions

·       A slump in September headline to 47.9

·       Three sub-indices in negative territory

·       Highest for delivery times

·       Lowest for workforce

We release today the latest reading (no 42) 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 Q2 2016, GDP contracted at constant basic prices by -2.1% y/y, the worst outturn since 2011 in the new national accounts. The figure was dragged down by a sabotage-driven -17.5% y/y contraction in the oil economy. The non-oil economy shrank by -0.4% y/y, and manufacturing by -3.4% y/y in Q2, compared with -7.0% the previous quarter. 

Our latest headline reading retreated to 47.9. This would be consistent with the widely expected, further contraction in GDP in Q3 2016. (Our expectation is -1.7% y/y.) The steep decline in the reading was driven by the secondary sub-indices (delivery times and stocks of purchases) as well as employment.

Fx sourcing issues for the majority of companies highly dependent on imported inputs continue to bite. While remaining negative for the sixth month in succession, the sub-index for output did pick up two points to 47.5.

We gather that the Manufacturers Association of Nigeria (MAN) expects the FGN to increase capital expenditure substantially in next year’s budget to as much as 45% of total budget.

The argument, we assume, is that spending on this scale would help to reduce the operational challenges of the sector considerably. Such an increase would only be feasible if the FGN could make further marked progress with revenue collection and control over recurrent items in the budget.

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