Supporting our positive outlook for 2018, Purchasing Managers’ Index (PMI) readings for January point to a strong start to the year. The manufacturing sector (57.3) expanded at the quickest pace on record while the non-manufacturing sector (58.5) expanded at the quickest pace since 2014 (both excluding December which is a seasonally stronger month). The strengthened economic climate was likely driven by healthy foreign exchange (FX) liquidity and stability, as well as improving aggregate demand.
Despite January readings showing no clear ill-effect of the petroleum product debacle, we consider this a pressure point for economic activity. We are aware of the ongoing Senate committee investigation into the matter but do not anticipate any official amendments to the petroleum pricing template in a pre-election year. As a result, we anticipate further volatility in product supply and prices across the country and envisage this as a challenge in 2018.
Overall, we anticipate a softer pricing environment in 2018, with high base effects from Q1’17 inflation driving speedy deceleration in inflation this quarter – January forecast: 15.1% y/y and February forecast: 14.7%. We expect this to support producer costs and consumer wallets. Furthermore, persistently strong oil prices should continue to buoy FX liquidity and budget implementation, both of which are key for sustaining Nigeria’s economic recovery.
Manufacturers look in better shape
Production Levels (59.6) and New orders (58.3) continued to drive the rapid expansion in manufacturing, though other sub-indices also expanded in the month. Notably, Supplier Delivery Times (56.8) were unaffected by the sporadic fuel shortages in the country at the start of the year. The increase in manufacturing demand (new orders) is yet to drive up Business Outstanding (42.9) even though manufacturers have reported dwindling stocks of finished goods. Meanwhile, a corresponding expansion in employment and high raw materials/WIP inventories in recent months suggests firms are in a good position to meet increasing consumer demand.
Key sectors show signs of expansion
Expansion in the non-manufacturing sector was primarily driven by much stronger Business Activity (61.3) and healthier Inventories (59.5). All but one manufacturing sub-sector expanded in January; Accommodation & Food (49.3) may have suffered more acutely from the hangover of the festive period. We highlight strong performances across key sub-sectors: Agriculture (61.3), Real Estate (62.9), Wholesale Trade (57.6) and Finance & Insurance (58.7), which cumulatively contribute over half of Nigeria’s GDP.
Key feature: Energy supply is one to watch
Despite January readings showing no clear ill-effect of the petroleum product debacle, we consider this a pressure point for economic activity. Higher global crude oil prices would continue to weigh on the price of deregulated products (e.g. diesel) which companies use to meet their energy needs. In addition, the variation in actual petrol prices and intermittent shortages could stymie the rebound in aggregate demand while also posing logistical challenges for firms. We are aware of the ongoing Senate committee investigation into the matter but do not anticipate any official amendments to the petroleum pricing template in a pre-election year. As a result, we anticipate further volatility in product supply and prices across the country and envisage this as a challenge in 2018.
Moderating inflation buoys outlook
Overall, we anticipate a softer pricing environment in 2018, with high base effects from Q1’17 inflation driving speedy deceleration in inflation this quarter – January forecast: 15.1% y/y and February forecast: 14.7%. We expect this to support producer costs and consumer wallets. Furthermore, persistently strong oil prices should continue to buoy FX liquidity and budget implementation, both of which are key for sustaining Nigeria’s economic.
