PMI No 22: a few steps backwards but still well above water


Tuesday, February 03, 2015 10:33 AM / FBN Capital Research


FBN released today the latest reading (no 22) of their manufacturing Purchasing Managers’ Index (PMI) for Nigeria (the only one of its kind), which takes the temperature of the sector.


This latest manufacturing Purchasing Managers’ Index (PMI) shows a retreat in the headline reading from 60.4 in December to 56.4. Our partner in this exercise, NOI Polls, has compiled the data.

Main conclusions:

·       January headline a comfortable 56.4

·       All of the five sub-indices in positive territory

·       Highest for new orders

·       Lowest for output


The index is a familiar release at the start of the calendar month in developed markets (such as the ISM in the US), the larger emerging markets like Brazil and China, and a few other frontier markets such as Vietnam.

The index is based on the responses of a number of manufacturing companies to set questions on core variables in their businesses. It is unweighted.


In the model we have chosen (the ISM’s), they are asked whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved, are unchanged or have declined. They are asked to make allowances for seasonal factors in their responses. A reading of 50 is neutral.


Our sample is a representative blend of large, medium-sized and small companies.


We have seen several pronounced swings since we launched our index in April 2013 but only once has there been a negative headline reading (49.4 in July 2013).  In our view these swings are consistent with Nigeria’s frontier market status. Changes in the operating environment such as access to electricity, fuel and credit, as well as swings in business and consumer confidence, help to explain these movements.


The new national accounts show manufacturing growth of 16.0% y/y in Q3 2014. We expect a slower rate in the Q4 report but strong growth figures are consistent with the consumption-led transformation of a pre-emerging market.


The headline index retreated from December, with no marked variations between company sizes. The macro headwinds should have an impact in time, particularly for the production, employment and stocks of large companies.


Encouragingly, the reading for new orders was the highest of the five sub-indices.


To set our reading within a global context, we note some other prominent reports for January: the US (ISM) at 53.5, the UK at 53.0, the Eurozone at 51.0 and China (HSBC/Markit report) below the water at 49.7.


More about the Index

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 start 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, and respondents are asked to make allowances for seasonal factors. Our reports cover a representative sample of the sector with large, medium-sized and small firms. Any broad conclusions about the economy generally on the basis of our reports need to be tentative because we are operating in a near void: there are few sources on sectoral trends. 


The national accounts for Q3 2014 released by the NBS show that growth in the manufacturing sector picked up to 16.0% y/y from 14.2% y/y recorded in the previous quarter. The sector represented 9.7% of constant price GDP in Q3, and its largest segment is food, beverages and tobacco, which accounted for 4.6% total GDP. We would expect slower growth for the sector in Q4 due to the gathering macro headwinds.


Our latest headline reading shows a retreat from 60.4 posted in December. The sub-indices were all lower than the previous month, and, unlike in December, the trends did not vary greatly according to company size. We are not surprised by large movements in the monthly readings (see left chart) because of the challenging operating backdrop. Our research concludes that Nigeria could boost its GDP growth by about two percentage points if the electricity industry was able to meet consumption demand. The federal finance minister has estimated the negative impact of the insecurity in the north east at half a percentage point annually.


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