Economic Note: Sustained Improvement In Business Conditions Despite Slowed Expansion In Production Level And New Orders

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Manufacturers and service providers reported sustained improvement in overall business conditions since April and May 2017 respectively. That was highlighted by the Central Bank of Nigeria’s (CBN) Purchasing Managers’ Index (PMI) report for the month of April released today. Specifically, both the headline composite manufacturing and non-manufacturing PMIs printed at 56.9 and 57.5 respectively, up from 56.7 and 57.2 a month before – an indication of strengthening business optimism. For context, compared to a year ago, the improvement in business conditions is underpinned by 580 bps and 800 bps expansions in manufacturing and non-manufacturing activities.

As a leading indicator, the details of the survey suggest that output growth maintained a positive trajectory in the second quarter of the year. For insight, the 56.9 and 57.5 manufacturing and non-manufacturing PMIs are both above the reported Q1-18 averages of 56.8 and 57.3 respectively. Thus, there is a case for (1) positive corporate performance in Q2-18, (2) sustained interest in risky assets, amid (3) stronger expectation for lower yields on government securities.

To reiterate, the continued improvement in the survey result is consistent with encouraging conditions in the overall economy, including (1) steady accretion (+2% m/m to USD47.36 billion, from USD46.26 billion) to the external reserves, (2) the apex bank’s sustained commitment to forex stability, which has helped narrow the spread between the official and parallel segments of the currency market rates, (3) positive expectation for output growth in 2018, after the pickup in 2017, (4) improving inflationary conditions, with headline inflation rate posting a faster moderation to 13.34% y/y in March (from 14.33% in February), (5) higher crude oil prices and stable domestic production, and (6) improving consumer expectation.

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Manufacturing PMI

Manufacturing activities improved for the thirteenth consecutive month, as shown by a PMI of 56.9, slightly higher than the 56.7 recorded in March. The faster pace of expansion in the manufacturing segment is traceable to stronger growth in three of the major diffusion indices that make up the manufacturing PMI – supplier delivery time (57.4, previously 59.1), employment level (55.0, previously 53.3), and WIP inventory (59.5, previously 59.4). The aforementioned helped mask slower expansion in production level (59.1, previously 58.6) and new orders (56.1, previously 55.8) – raising concern about the level of demand in the manufacturing space. The sustained stability of the naira exchange rate, coupled with the widely positive near-to-medium term outlook for the currency, remains a major driver of the sustained expansion in the composite manufacturing PMI.

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Of the 15 subsectors surveyed, 12 reported growth in the review month in the following order: petroleum & coal products, electrical equipment, appliances & components, printing & related support activities, textile apparel leather & footwear, fabricated metal products, chemical & pharmaceutical products, food, beverage & tobacco products, paper products, furniture & related products, plastics & rubber products, transportation equipment. The cement sub-sector remained unchanged, while the non-metallic minerals and primary metal subsectors declined in the review month.

Non-manufacturing PMI

Similar to the manufacturing PMI, non-manufacturing PMI increased at a faster pace of 57.5 in April, up from 57.2 in March. The faster growth in the sector was supported by stronger improvement in all four major diffusion indices that constitute composite index. To state, business activity (58.8, from 58.7), new orders (56.4, from 55.8), employment level (55.3, from 55.1), and inventory (59.5, from 59.2) all expanded at a faster pace, compared to the month of March.

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Fifteen (15) of the eighteen (18) subsectors recorded growth in the following order: arts, entertainment & recreation; finance & insurance; public administration; utilities; educational services; agriculture; health care & social assistance; information & communication; water supply, sewage & waste management; repair, maintenance/washing of motor vehicles; professional, scientific, & technical services; wholesale/retail trade; accommodation & food services; construction; and real estate rental & leasing. The management of companies subsector remained unchanged, while the transportation & warehousing; and the electricity, gas, steam & air conditioning supply subsectors recorded contraction in the reviewed period.


April 2018 PMI data fuel optimism about output growth in H1-18. There are no sufficient reasons to expect contracting PMIs over the rest of 2018, as the impact of the positive drivers supporting the encouraging figures deepens further. Specifically, we highlight the (1) CBN’s sustained commitment to forex stability, (2) rebounding aggregate demand, with inflationary pressure moderating further as exchange rate and energy prices post no negative surprises, in addition to (3) a pickup in government spending, in line with the 2018 budget, and (4) strengthening consumer expectation. Particularly on forex, suffice to say that confidence has further strengthened vis-à-vis the near-term outlook of the domestic currency amid continued healthy accretion to the nation’s foreign reserves, which currently stands at a high of USD47.36 billion, with oil prices staying healthy at USD75.31/barrel, and stable crude production (1.81mb/d, according to available data from OPEC).


Cordros Research…


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