PMI Data: Business Activities Cooling but at Slower Pace

The CBN released its Purchasing Manager’s Index (PMI) survey report for March 2016 on the 31st of March. The survey, which gauges sentiment in the manufacturing and non-manufacturing sectors  expectedly came weak with Manufacturing and Non-Manufacturing Composite indices declining for the 3rd consecutive month, albeit at a slower pace relative to February data.

Manufacturing PMI was at 45.9 in March, below the 50.0 threshold that separates growth from contraction, but marginally up from 45.5 in February due to slower pace of contraction in manufacturing production level, employment and inventory sub-indices. This decline in March means manufacturing PMI has contracted all through Q1:2016 and retraced from the strong rebound observed in Q4:2015. Our trend analysis of the manufacturing PMI and Manufacturing sector GDP growth shows a strong relationship with Growth turning positive in Q4:2015 when Manufacturing PMI Improved and negative between Q1:2015 and Q3:2015 when the PMI contracted. We believe the weak numbers in Q1:2016 is an indication that growth in the Manufacturing sector will be below-trend.

Similar to the manufacturing sector, composite Non-Manufacturing sector PMI contracted all through Q1:2016 but was a slower pace in March with the index gauge at 45.4 in March from 44.3 in February.  New orders and business activity declined at a slower pace but inventories/raw-materials and level of employment sub-indices fell faster in the month. We are particularly worried by the weaker readings in Non-manufacturing PMI in the Quarter as this is the first quarter the sector recorded PMI contractions all-month since the beginning of the data series. The sector has been the major driver of growth and highest contributor to absolute nominal and real GDP over the years; hence we expect a negative feedback on Q1:2016 GDP numbers not due till May.

However, we think that Nigeria still has immense growth potential and the factors contributing to the slacking business activity and business confidence are structural – FX access, lower fiscal spending, power and fuel shortages – and probably transitory once implementation of the 2016 budget commences and various deadlines for resolving energy and FX shortages are met. We expect to see a rebound in Q2:2016 and retain 3.5% growth forecast for GDP for FY: 2016.