November 2016; Just Below Neutral


Thursday, December 01, 2016/10:44 AM /FBNQuest Research

Main conclusions

·       Retreat in November headline to 48.8

·       One sub-index in positive territory

·       Highest for delivery times

·       Lowest for workforce

We release today the latest reading (no 44) 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 developed into a core forward indicator.  

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 possible replies: better, unchanged or worse than the previous month.

According to the standard 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 Q3 2016, GDP contracted at constant basic prices by -2.2% y/y, the worst outturn since 2011 in the new national accounts. The figure was dragged down by a sabotage-driven -22.0% y/y contraction in the oil economy. The non-oil economy was flat y/y, while manufacturing shrank by -4.4% y/y in Q2, compared with -3.4% the previous quarter. 

Our headline readings show striking variations on account of choppy operating conditions. A measure of this fluidity is that 7% of respondents changed company size, based on the size of their payroll, in November. All five sub-indices declined, and the latest headline takes the index back below water for the fifth time this year although well above the low of 44.6 in January.

We think that the non-oil economy is at the low point of the current cycle and see a modest pick-up in Q4 on the back of the seasonal boost to household spending and an acceleration in capital releases by the FGN.

We suspect, however, that manufacturing will be one of the last sectors to benefit because of the scarcity of fx, which we expect to continue well into the new year.

Fx sourcing issues for those companies dependent on imported inputs (the majority) continue to bite. Additionally, the Q2 national accounts on an expenditure basis, anecdotal evidence and the commentary of listed companies all point to the softness of household demand.

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