Monday, December 04, 2017 / 1:15 PM
The CBN released Nigeria’s Purchasing Managers’ Index (PMI) for the month of November with both manufacturing (55.0 to 55.9), and non-manufacturing (55.3 to 57.6) sectors expanding at a quicker pace.
Much stronger readings in November
manufacturing sector expanded at a record pace in November as all five
sub-indices accelerated during the month. Notably, employment levels (October:
53.1, November: 53.7) continued to rise at a quicker pace, pointing to a sturdy
improvement in labor market conditions in recent times – unemployment rate last
recorded at 14.2% at the end of 2016.
However, survey responses indicate that export demand remains soft (37.6) whilst the inflationary environment continues to pressure input (64.3) and output (54.0) prices.
At 57.6, non-Manufacturing PMI was by far the highest in 2017 (previous: 55.3 in October), suggesting a marked month-on-month improvement in the broader services sector of the economy.
Similar to the manufacturing sector, all four sub-indices expanded at a faster pace, led by Business Activity (57.5 to 59.4) and New Orders (55.7 to 58.4) – pointing to strengthening aggregate demand. Once again, Agriculture (64.6 to 78.3) was a significant mover, closely followed by Utilities (62.5 to 73.8) and Finance & Insurance (60.1 to 62.0).
Key feature: Weak Q3 GDP puts spotlight on PMI
Despite very strong Q3’17 PMI figures across both manufacturing (average: 54.3) and non-manufacturing (54.5) sectors, economic growth in the third quarter was solely driven by a recovery in oil production (Oil sector GDP: 25.4% y/y) as the non-oil sector actually contracted 0.8% y/y. Drilling down, the manufacturing sector shrank 2.9% y/y and services shrank 2.4% y/y.
This divergence between hard and soft data is not unique to Nigeria and follows a recent global trend. In the United Kingdom, post-Brexit confidence indicators slumped and have remained relatively low despite the economy proving comparatively resilient in the last eighteen months. Meanwhile, strong consumer and business confidence in the United States has failed to translate to materially higher economic growth.
Understanding the limitations of PMI and similar soft data sheds light on the potential reasons for this divergence. PMI readings in Nigeria are a barometer of business sentiment, and actual output may sometimes lag changes in sentiment. Alternatively, sentiment could be driven by other factors; for example, stronger expressions of business confidence in the U.S. have been linked with partisanship.
All in all, leading indicators such as PMI remain very useful gauges of economic pulse despite their limitations, and can sometimes pinpoint the precise drag on the economy. In Nigeria's case, with business sentiment stronger for most of 2017, sluggish non-oil GDP recovery could be driven by softer consumer demand which would not be picked up as cleanly by PMI surveys.
Brighter 2018 outlook
The seasonal boost should drive another strong PMI reading in December. Although we expect Q4’17 GDP to come in positive, we adopt a cautious stance amidst underlying consumer weakness and forecast growth of 1.0% y/y (2017E: 0.6% y/y). Our outlook for 2018 is much brighter, supported by receding inflation and likely monetary stimulus, continued stability in the foreign exchange market, and improvements in consumer spending power and aggregate demand. We forecast GDP growth of 2.0% y/y.