Stanbic IBTC PMI highlights six months of business expansion

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The Nigerian private sector experienced a steady growth in the first six months of 2021 following the gradual easing of the COVID-19 pandemic-induced restrictions, the Stanbic IBTC Purchasing Managers Index (PMI) reports have shown. The PMI is a measure of the prevailing direction of economic trends in the manufacturing and service sectors within a gerography and for a given period. It is a tool which provides information about current and future business conditions to company decision makers, analysts, and investors.

Manufacturing, services, wholesale and retail, and agriculture all posted optimistic growth in the period under review. Strong demands – both local and foreign – and outputs underpinned the expansion. The PMI for H1 was at it’s lowest for the year at 50.7 in January, peaked 54.4 in May; and subsequently dropped to 53.6 in June. For February, March and April, the PMI was at 52.0, 52.9 and 52.9 respectively.

Overall, in the six months to June, the PMI highlighted expansion in business operations, showing a rebound in economic activity in 2021 in contrast to a subdued 2020 performance due to the COVID-19 pandemic. It witnessed robust purchasing activities, a rise in employment and inventories as optimism persisted.

In January, the PMI recorded a decline to 50.7 from 51.8 recorded in December 2020. Despite the decline, the PMI which was above 50 still signalled an improvement in business conditions. New order inflows and output were the key growth drivers. Cost-cutting measures by companies including layoffs, defined the month. “Substantial increases in input costs and selling prices contributed to a moderation in expansion of outputs and purchasing activity. As a result, firms looked to cut costs by reducing their workforce,” the Stanbic IBTC PMI report highlighted.

The February data showed that businesses continued on the expansionary trajectory, with a PMI of 52.0, up from 50.7 in January. The growth was again driven by significant growth in new orders and output. Companies expanded their purchasing activities to support rising outputs. Of particular interest in the month was the uptick in foreign demand for Nigerian goods and services as well as the marginal improvement in employment situation as firms added to their headcounts. However, unfavourable exchange rate movements, higher material costs and a rise in wages due to resumption in hiring added to strong inflationary pressures in February, with overall input prices increasing at a record pace.

Business expansion remained bullish at the close of the first quarter of 2021. The PMI for March at 52.9 reorded improvement from the 52.0 the month before. Growth in demand continued to pull output higher.

Manufacturing, services, and agriculture posted the strongest growth in output in March. Wholesale and retail, however, experienced declines in activity. Hiring activity also continued in March. Meanwhile, the report showed that rising costs from wages and raw materials purchases led to a rise in output prices.

At 52.9 in April, the start of the second quarter, the headline PMI rate remained flat from the previous month. Domestic demand rose significantly in April which further boosted output. The output for April though was lower than recorded in March. In terms of sector growth, agriculture recorded the fastest output growth followed by services and manufacturing. Wholesale and retail recorded a second month of decline. The report showed that backlogs continued to decline, with the second-sharpest decline rate ever achieved in April. The decline in backlogs was underpinned by rising employment.

May headline PMI rate at 54.4 was the sharpest in the period under review, and the sharpest, the report showed, since August 2020. New orders, particularly from higher client numbers in the international market as was the case in February 2020, were the key drivers of the expansion in May. Employment remained robust in line with growing output. Larger output requirements equally boosted buying activity and inventory holdings. Rising staffing levels allowed firms to complete orders in a timely manner, with backlogs falling at the third quickest rate in the survey to date.

At sector level, the PMI report showed expansion was broad based with manufacturing, agriculture, wholesale and retail, and services all experiencing growth in May. Manufacturing and agriculture though outperformed others. May also witnessed a further improvement in vendor performance.

June maintained the sequence of expansion to close the second quarter at a PMI reading of 53.6, the second highest recorded growth in the period under review, behind May, which posted a 54.4 reading. Output growth moderated in June despite a sharp rise in client demand. The rate of expansion was still solid but posted below the long-run series average. Sector data showed that services achieved the sharpest increase in activity followed by wholesale and retail, manufacturing, and agriculture, which rose fractionally. Buying activity and inventories also rose in June, though the rate of expansion was not as robust as witnessed in previous months.

We expect sentiments regarding the next six months will remain upbeat, with hopes of greater demand fueling optimism to ramp up expansion plans and invest in marketing.

Businesses will likely raise their inventory holdings in anticipation of greater output in the months ahead, with the confidence that further economic disruptions due to COVID-19 are highly unlikely as vaccines become readily available. That said, the degree of optimism may remain below the long-run series average, suggesting pandemic uncertainty, particularly with the newly discovered Delta variant which may weigh slightly on hopes for the future.

On the price front, the volatile exchange rate regime, rising raw material prices, transportation costs and increasing wage bills, all of which negatively impacted overall input prices in the period under review, are likely to remain a challenge in the second half of the year. However, the expected bullish demand environment will allow firms to pass on higher prices, with charges rising substantially.

Although the Stanbic IBTC PMI moderated to 53.6 in June from 54.4 in May, Nigeria’s private sector activity remained strong with the index registering a score above 50 for the 12th consecutive month. It is very likely that economic growth will be protracted this year across most economies, including Nigeria, owing to the rapidly evolving nature of the pandemic.

Daily COVID-19 infection numbers in Nigeria still remain low. However, given the fact that the country’s land and air borders remain largely open, there remains a risk of third-wave stemming from imported cases. In that instance, a return to more stringent public health restrictions could tame the continued recovery expected this year.

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