In line with our expectation, the Purchasing Managers’ Index (PMI) survey report by Central Bank of Nigeria (CBN), showed slower growth in manufacturing businesses in March 2020 as production level and new orders indices fell sharply.
However, non-manufacturing businesses contracted amid declining incoming business. According to the survey, the manufacturing composite PMI expanded slower to 51.1 index points in March (from 58.3 in February), the thirty-sixth consecutive expansion.
The muted growth in manufacturing composite PMI was due to slower expansion in production level index to 54.4 in March 2020 (from 58.9 in February 2020) which was caused by a slower expansion in new orders – the index decreased to 52.3 in February 2020 (from 59.1 in February 2020).
New orders and production quantity slowed despite the marginal decrease selling prices (output price index melted to 53.0 from 53.7). Producers margin compressed as the average cost of production increased – the input price index rose to 62.6 from 61.4). Suppliers of raw materials delayed on the delivery time of inputs despite slower production level – supplier delivery time index contracted to 49.4 in March (from 58.4 in February) amid coronavirus pandemic.
Given the lower production level, slower demand and significant delay on delivery time, raw materials/work-in-progress contracted, to 49.4 from 58.5. Producers still increased their quantity of raw materials purchased despite higher input costs – the quantity of purchases index expanded faster, to 55.6 from 55.5.
We saw the stock of finished goods decrease – its index expanded faster to 50.3 in March 2020 from 51.8 in February 2020 as sales slowed significantly. The number of new hires recorded by manufacturers declined in tandem with the lower production volume – the index for employment contracted to 47.1 points in March 2020 (compared to 56.4 points in February 2020).
None of the fourteen manufacturing sub-sectors surveyed recorded faster expansions, poor performance when compared with three (or 21.43%) printed in February 2020.
Even worse, the nonmanufacturing sector contracted as its composite PMI declined slightly below the inflexion point of 50, to 49.2 index points in March 2020 (from 58.6 index points in February 2020), the first contraction after thirty-four consecutive months of expansion.
This was chiefly driven by the decline in incoming business and slower growth in business activity to 47.8 (from 58.8) and 52.2 (from 59.3) respectively. Business activity shrank despite the slower rise in the average price of inputs, to 51.2 index points in March 2020 (from 52.1 index points in February 2020).
Service providers’ inventories contracted, to 49.6 (from 58.4), as incoming business slowed. Also, employment declined to 47.3 (from 57.8) amid slower business activity. Of the seventeen manufacturing sub-sectors surveyed, three sub-sectors (or 17.65%) recorded faster expansions, showing a weak performance than the nine (or 52.94%) it printed in February. Notably, service providers of ‘Management of companies’ registered the sharpest expansion in activities of 87.5 (from 66.7).
The possibility of recession despite the expansionary drive policies of CBN is fast becoming obvious given the drop in the non-manufacturing PMI below the inflexion point of 50. Although manufacturing PMI was marginally above 50 points, we expect it to sink below 50 index points next month as the World continues to battle the novel disease (COVID-19). Hence, the inevitable recession may hit Nigeria soon even in 2020 as more state governors order a partial lockdown of business activities. Therefore, in line with our earlier thought on slower Q1 2020 GDP growth expectation amid declining production output and services render, we suggest a cautious investment approach even in the equities market. Nevertheless, investments in the healthcare sector could be a viable option in the short term, as COVID-19 stimulates both fiscal and monetary interventions in the sector.
Cowry Asset Research