PMI Reading No 95: Above Water Again

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Our manufacturing Purchasing Managers’ Index (PMI), the first in Nigeria, made a good recovery from 44.5 to 53.0 in February. 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 Brazil, China and Russia, and a large number of 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 ’17 and our lowest 43.3 during lockdown in May ’20. 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 declined. 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. Q2 ’20 proved the low point of 2020 for both series, GDP contraction of -6.1% y/y and an average manufacturing PMI of 47.7, because it roughly coincided with the lockdown. As the restrictions have been eased, so the indicators have risen off the floor.

The national accounts for Q4 ’20 tell us that 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) posted negative growth for the third quarter in succession, the victim of challenges in accessing fx for imported raw materials as well as, we assume, the reality that its goods have slipped down the priority list of households in the face of squeezed purchasing power.

The two largest segments account for c.70% of manufacturing output. The sector is dominated by consumer goods industries. Indeed, by our calculations just 4% of output could loosely be classified as heavy industrial. Cement falls between the two, representing c.10% of total output and growing in importance. Like our PMI, the national accounts are not seasonally adjusted.

Our surveys include trigger questions, which arise when a respondent has given the same answer on a sub-index for two successive months and then changes it for the third.

The good recovery was driven by medium-sized and small firms. Among their positive responses we note: an improvement in demand; a full month’s production (whereas many firms resumed late in January after the holidays); and an easing of COVID-related restrictions.

The reading for employment fell marginally to 48.0%. Since GDP per head has not been positive since Q3 ’15, business has generally been reluctant to hire additional workers. According to the National Bureau for Statistics, the unemployment rate in Q2 ’20 was 27.1% and the underemployment rate a further 28.6%. The leadership of the Manufacturers’ Association of Nigeria, interviewed in December, saw an unemployment rate of 50% ahead.

The most popular answer in our surveys is ‘no change’. This accounted for more than 50% of responses for all five 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 slightly from 50.7 to 50.8 in February.

For the broader context, Nigeria’s headline reading for February is above those of China, Japan and Russia, and lags the UK, India, the Eurozone and the US (ISM).

There is no clear historic pattern to our March readings. The answers to our trigger questions this time suggest that we may see a small increase in our next report.

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