The Central Bank of Nigeria (CBN) released its Purchasing Managers’ Index (PMI) readings for the month of May, indicating that the economy expanded at a slightly slower pace across both manufacturing and non-manufacturing sectors. Manufacturing PMI fell from 56.9 to 56.5 as Production and Employment Levels quickened but New Orders and Inventories decelerated. Likewise, Non-Manufacturing PMI declined from 57.5 to 57.3 as Employment levels expanded faster and growth slowed in the other three components.
Positives to choose from across key sectors
Manufacturing activities continue to enjoy the benefits of a stable foreign exchange (FX) market and moderating inflation, with consistently strong Q2 PMI numbers pointing towards a modest follow-up to the 3.4% y/y GDP growth recorded by the sector in Q1’18. Notably, the Food, Beverage & Tobacco and Cement sub-sectors expanded at a quicker pace in May while growth in the Textile industry slowed – these three sectors account for 77% of Nigeria’s manufacturing output.
The agriculture and services sectors struggled in the first quarter of 2018, notching respective real GDP growth rates of 3.0% y/y and -0.5% y/y, compared to the 3.8% y/y and 1.2% y/y we had expected. This economic performance contrasted with strong PMI readings during the period (Q1’18 average of 57.3 vs. H2’17: 56.4). Q2 PMI readings continue to indicate that confidence across sectors is broad-based – sixteen of eighteen sectors have expanded in the past two months. There was even better news on the pricing front as the pace of non-manufacturing input price inflation has abated towards the 50-mark that signifies no change.
Key feature: Which sector is doing better?
Non-Manufacturing PMI has consistently outpaced Manufacturing PMI as it has registered higher in all but two of the last twelve months dating back to June 2017. Q1’18 GDP numbers tell a different story and industrial activity has fared better than agriculture and services in recent times – Manufacturing GDP: 3.4% y/y, Agriculture: 3.0% y/y, Services: -0.5% y/y. Ultimately, GDP figures are more relevant as they are based on realized output while PMI is a survey of business confidence which is subject to measurement error, sample bias, etc. As such, we are cautious when drawing an inference from PMI data but still consider it a useful quick gauge of economic activities.
Government spending provides potential upside
Nigeria’s economic recovery is being supported by a low 2017-base, FX market stability, and slowing inflation. We expect the imminent passage of the 2018 Budget and pre-election spending to provide a short-term fiscal stimulus on the economy and highlight the impact of political uncertainty on investment as the primary risk to business activity in the near-term.