Onome Amuge
The Nigerian private sector returned to expansionary territory in December, with the PMI rising to 52.7 in December from 48.0 in November. as business output and new orders increased at a moderate pace, driven by a rise in domestic demand, according to Stanbic IBTC Bank Nigeria Purchasing Managers’ Index (PMI).
The improvement in the Nigerian PMI reading from 48.0 in November to 52.7 in December signals a significant improvement in the health of the private sector. The PMI is a diffusion index that measures the change in business conditions from one month to the next. A reading above 50.0 indicates an improvement in business conditions, while a reading below 50.0 indicates deterioration. The most recent reading of 52.7 is the highest since June, indicating that the Nigerian private sector is experiencing a solid improvement in conditions.
While the latest survey data pointed to a rebound in business conditions, inflationary pressures continued to persist. Input costs rose at the sharpest pace in four months, amid higher raw material and transportation costs. As a result, firms raised their selling prices at a marked rate in order to pass on some of the cost burden to customers. Despite these price increases, profit margins continued to decline, albeit at a softer rate than in November.
The business confidence index of the Stanbic IBTC PMI declined to its second-lowest level on record, highlighting the ongoing uncertainty about the outlook for the Nigerian economy.
In the third quarter of 2023, Nigeria’s GDP grew by 2.54 per cent on a year-on-year basis, an improvement from the 2.51 per cent growth recorded in the previous quarter. The higher growth rate was driven by a marginal decline in oil sector output, offset by a slower growth in the non-oil sector. The report noted that the non-oil sector growth was constrained by the impact of fuel subsidy removal and foreign exchange (FX) reforms. For the full year 2023, the report projects GDP growth of 2.6 per cent, supported by a recovery in the oil sector.
Despite the return to growth, the survey respondents noted that inflationary pressures remained elevated, with both purchase costs and selling prices rising at a faster pace than in the prior month.
The report highlights the key role that food prices play in driving inflation in Nigeria. Food inflation in the country is currently at 32.84 per cent y/y, driven by floods that disrupted local food production, the weak naira, and high transport costs. With inflationary pressures expected to remain elevated in the near term, this could put further pressure on the cost of living for Nigerians.
The positive PMI reading for December was driven by a solid increase in new orders and business activity. The rise in business activity was also the most significant since June, pointing to a strengthening in economic activity. However, the sector data showed that the wholesale and retail sector continues to face headwinds, as activity in this sector remained in contraction territory.
The pick-up in new orders and business activity in December occurred despite continued high price pressures. Overall input prices rose at a slightly slower rate, although the increase was still among the most marked since data collection began in January 2014. The softer increase in input prices was driven by a slower rise in staff costs, although these remained well above average.
The survey data indicated that input price inflation and higher costs of animal feed, along with higher fuel costs and a weak exchange rate, were the main factors driving selling price inflation higher in December. The rate of increase in selling prices accelerated and was the fastest since August, as companies passed on higher input costs to customers. Despite ongoing price pressures, businesses hired more staff in December, reflecting the improved economic conditions. This extended the current sequence of job creation to eight months, the longest seen since the start of the survey in January 2014
The survey data for December showed a rise in both purchases and inventories, as businesses sought to increase their stock holdings in response to rising input costs and longer delivery times. Backlogs of work also increased in December, the third time in the past four months, indicating that businesses were struggling to keep up with demand.
Despite the improvement in business conditions, confidence in the 12-month outlook for activity continued to deteriorate in December. The degree of optimism eased to the joint-lowest since the survey began in January 2014, as firms remained cautious about the economic outlook.
Muyiwa Oni,head of Equity Research West Africa at Stanbic IBTC Bank remarked that the December PMI reading suggests a strong improvement in the health of the Nigerian private sector. Oni noted that this was the most marked improvement since June, reflecting an upturn in demand conditions. He said that new orders increased at the fastest rate since June, following two months of contraction.
