PMI Reading No 96: A Modest Retreat

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Thursday, April 01,  2021 / 09:17 AM / By FBNQuest Research / Header Image Credit: FBNQuest            


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Our manufacturing Purchasing Managers' Index (PMI) declined from 53.0 to 51.4 in March. It was the first of its kind in Nigeria. Our partner, NOI Polls, collects the data. An index is produced in advanced economies such as by the Institute for Supply Management (ISM) in the US, larger EMs such as China, India and Russia, and a large number of emerging/frontier markets. It is based upon manufacturers' responses to set questions on core variables in their businesses. In our case, it is not seasonally adjusted. Our highest reading to date has been 68.7 in December 2017 and our lowest 43.3 during lockdown in May 2020. In our unweighted model (that of the ISM), respondents are asked whether output, employment, new orders, suppliers' delivery times and stocks of purchases have increased over the previous month, are flat or have fallen. A reading over 50 (ex 100) denotes expansion for the sector.

 

PMIs, unlike the national accounts, are forward-looking indicators with the proven ability to move financial markets in advanced economies. Q2 '20 proved the low point of the year of Covid-19 for both series, and Q4 '20 brought a modest recovery: GDP growth of 0.1% y/y and an average manufacturing PMI well above water at 53.6.

 

In Q4 '20 the contraction of manufacturing was unchanged from the previous quarter, at -1.5% y/y. Its largest segment (food, beverages and tobacco) grew by 2.2%. In contrast, the second largest (textiles, apparel and footwear) contracted for the third quarter in succession, the victim of challenges in accessing fx for imported raw materials. The third (cement) expanded by 6.6%, benefiting, we suspect, from FGN orders for its infrastructure programme.

 

Our surveys include trigger questions, which are put to respondents when they have given the same answer on a sub-index for two successive months and then change it for the third.  Two consistent themes this time were the cost and availability of imported raw materials, and a change to the demand profile ahead of the fasting season (Ramadan) that opens this month.   

 

The most common answer in our surveys is 'no change', accounting for over 60% of responses for all sub-indices. In two cases (employment and suppliers' delivery times), it exceeded 80%.

 

On a 12-month moving average basis, the headline index picked up from 50.8 to 51.1 in March.

 

The FGN has plans for the sector, which we learnt from a virtual dialogue on light manufacturing on Tuesday under the auspicies of the Nigerian Economic Summit Group (NESG). The federal minister of industry, trade and investment highlighted a target for a 20% manufacturing share of GDP by 2023. This is ambitious, the latest figure being 12.8% in 2020 at current prices. The thinking is drawn, we assume, from East Asian success stories.

 

Brands are too weak in the minister's view, and spending on marketing, research and development is too low. The FGN's response is a combination of: funding including the CBN's NGN1trn facility for manufacturing in the face of Covid-19; special economic zones; and strategic plans due later this year for oil palm, clothing and textiles, and automotive assembly.

 

The latter is also a favourite of the NESG, judging from the presentation within the event on Tuesday on the Moroccan automotive industry. It has been a remarkable transformation in terms of exports, employment and the increasing use of local content, all based upon the harmonisation of regulations, partnerships and the infrastructure in the kingdom. Given the importance of Morocco's association agreement with the EU, however, we wonder whether the focus of the FGN and the NESG should be on other manufacturing segments.


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