Wednesday, November 02, 2016 6:48pm/ Vetiva Research
Perception of business activity has deteriorated every month this year, according to the CBN Purchasing Managers’ Index (PMI) which revealed a Manufacturing PMI reading of 42.5 and 44.1 and a Non-Manufacturing PMI reading of 41.0 and 43.4 for September and October respectively. Nevertheless, the improvement in October’s reading (though still below the “no change” threshold of 50) offers some hope for the final quarter of the year.
New Orders continue to drop
The PMI figures make grim reading as they indicate that business activity is still contracting but we can draw out different trends for the months. Notably, October Manufacturing PMI is the highest since May 2016 (45.8) which suggests a regression in the pace of decline in productive activity moving past Q3.
In contrast, the malaise in September is evidenced by the observation that all 16 subsectors of the manufacturing index experienced declines – the first time on record.
Once again, Supplier Delivery Time (15% of index) was the only bright spot, accelerating after a slight slowdown in September (55.6) to reach a year-high of 57.7 in October. The sustained improvement in the sub-Index was driven by significant improvement in Petroleum & Coal Products (September: 62.5, October: 69.2), Paper Products (October: 59.3 after 4 months of contractions), and steady improvement in Chemical & Pharmaceutical Products.
In contrast, the New Orders sub-Index, the largest contributor to the index (30%) remains the biggest headache as it recorded the largest declines across all the sub-Indices. In each month, only one subsector recorded an improvement – Petroleum & Coal Products in September and Food, Beverage & Tobacco products in October – reflecting persistent weak demand in the economy.
In a similar vein, the woes continued in the Production Level sub-Index (25% of index). In the last three months, there has only been one reading above 50 across all subsectors – 60.3 recorded in Food, Beverage & Tobacco in September. In October, both Employment Level (10% of index) and Raw Materials (20% of index) sub-Indices continued to contract, albeit at a slower pace.
Non-Manufacturing PMI rises slightly as school year begins
Non-Manufacturing PMI slipped to its lowest reading of the year in September (41) as Business Activity (sub-40 for the first time) and Raw materials inventories in particular stalled significantly.
Following this, less steep declines in Business Activity and Level of New Orders led to a slighter drop in non-Manufacturing productive activity in October as composite PMI registered at 43.4.
Across subsectors, Agriculture continues to be resilient, buoyed by strong growth in the Business Activity and Raw Materials Inventories sub-Indexes in both September and October.
Meanwhile, Educational Services also improved significantly during the period (September: 61.2, October: 60.9) coinciding with the start of the academic year when we would expect to see the most activity – there was a corresponding spike in 2015.
On the other hand, Construction hit a year-low in October (contracting for 17 straight months) as recent cement price hike (c.45% in late August) further weighed on the sector.
This comes in despite a reported ₦23.5 billion (14% of budgeted allocation) and ₦170 billion (48% of budgeted allocation) to the Federal Ministry of Transport and Federal Ministry of Works, Power & Housing in capital disbursement so far this year.
Key feature: Shrinking output in the quarter
As PMI is a leading indicator, looking at quarterly data, we get an insight into likely economic performance. Average Manufacturing PMI was 42.9 in Q3 vs. 43.8 in Q2 whilst Non-Manufacturing PMI averaged 42.6 in Q3 vs 43.6 in Q2, indicating another quarter of strong negative GDP growth following the -2.06% contraction in Q2 (Vetiva Q3 estimate: -1.72%).
PMI to remain below threshold amidst subdued demand
The data broadly suggest a persistently weaker business environment as aggregate demand remains depressed. Consumer spending has been dampened by lower real wages just as investment has stalled on uncertainty and high interest rates.
Looking to the end of the year, a ramp up in government spending and an improvement in the current account (oil production is likely to have been back above 2 million barrels per day in October but non-oil exports need to rise as well) will be the main drivers of a rebound.
We expect both PMI readings to remain below 45 in November as business expectations remain subdued.
1. Manufacturing PMI Stands at 44.1% in October from 42.5% in September 2016 - CBN
2. October 2016 PMI - Back into Positive Territory
3. PMI Reading No 43 - A Marked Rebound
4. September 2016 PMI is Back in Negative Territory
5. PMI Reading No 42: A Reality Check
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7. Nigeria's GDP Declines to -2.06% in Q2'16 from -0.36% in Q1'16; Lower by 1.70%
8. Domestic Debate About Sale of State-Owned Assets
9. Should Nigeria sell its national assets?
10. Nigeria Slumps into Recession in Q2
11. PMI Reading No 41 is off the Floor
12. Will Positive Real Yield Attract FPI?
13. Manufacturing PMI Declines to 42.1% in August from 44.1% in July 2016 - CBN
14. Manufacturing PMI Rises Marginally to 44.1% in July 2016 from 41.9 in June - CBN
15. July 2016 PMI is Slightly Above Water
16. PMI Reading No 40 Shows a Modest Improvement from 50.2 in June to 51.0
17. PMI reading no 39 records a modest uptick to 50.2