August 6, 2021/Proshare
by FBNQuest Research
Our manufacturing Purchasing Managers’ Index (PMI) remained in negative territory in July, easing from 48.8 in June to 48.0. It was the first of its kind in Nigeria, and we have now achieved a century of reports. Readings for two of the five sub-indices fell in the month, and a further two were flat. 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 India, and a good number of emerging/frontier markets. It is based upon manufacturers’ responses to set questions on core variables in their businesses. Our highest reading to date has been 68.7 in December 2017 and our lowest 43.3 during selective lockdown in May 2020.
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 fallen. A headline reading over 50 (ex 100) indicates expansion for the sector.
On a 12-month moving average basis, the headline index weakened from 51.9 to 51.5 in July.
PMIs, unlike the national accounts, are forward-looking indicators. Neither in Nigeria is seasonally adjusted. Our indices are now running four months ahead of the accounts, the latest of which covers Q1 ’21. They move markets in advanced economies, which was evident during lockdown and the recovery from it across jurisdictions in H1 ’20.
The FGN has set a target of a 20% manufacturing share of GDP by 2023. This is ambitious, the latest figure being 12.8% in 2020 at current prices. The aspiration is drawn, we assume, from East Asian success stories. In this model commercial agriculture provides the raw materials for a wide range of manufacturing goods, which would explain why the federal industry ministry plans to finalise strategies for oil palm, and clothing and textiles later this year.
Manufacturing may have supplanted retail trade and become the second largest sector in the economy in Q1 (after agriculture). However, it is far from generating an Asian multiplier effect on wealth and employment.
It is broadly producing consumer goods for a large population that is growing at a decent rate. Those segments in heavy industry contribute little overall: oil refining; basic metal, iron and steel; and if we are being charitable, motor vehicles and assembly.
The NOI surveys include trigger questions, which are put to respondents when they have given the same answer on a sub-index for two successive months and changed it for the third. Responses in this survey are thinner than usual because of the modest changes in readings across the sub-indices. The common negative themes are again the rainy season, and the high cost of raw materials.
The most popular answer in our surveys is ‘no change’, accounting for over 50% of responses for all sub-indices. In employment and suppliers’ delivery times, its share exceeded 85%.
The best performing sub-sector during life with COVID has been cement. Its contribution to manufacturing GDP at current prices has increased to 21.1% of the total in Q1 ’21 from 18.6% one year previously.
The main inputs for cement production, unlike textiles and footwear for example, are available locally. Additionally, the FGN has an ambitious agenda for capital spending. Two large cement producers in our coverage posted sales growth of 8% and 3% q/q in Q2 ’21. The y/y ratios look far better but are comparisons with Nigeria’s quarter of lockdown (Q2 ’20).
China’s manufacturing PMI (the official series) weakened from 50.9 to 50.4 in July. This is the lowest reading since the country emerged from the pandemic in Q1 ’20. The sub-indices for employment and export sales were particularly weak.
