Can Nigeria “technically” exit recession in this quarter?

It does not look like Nigeria is getting out of recession this quarter, going by the PMI figures released by the Central Bank of Nigeria (CBN) and FBNQuest.

PMI stands for Purchasing Managers Index and it is arrived at by asking a selection of companies their views on core variables in their business.

The questions are usually directed at the man or woman making the purchasing decisions in the firm since that the decision is likely to be based on his or her expectations of the performance of the firm going forward. The purchasing manager will likely order for more inventory if he expects that production activities will increase.

So as FBNQuest puts it, they usually ask the purchasing his expectations and he given three options of possible replies: better, unchanged or worse than the previous month. The answers from different purchasing managers are aggregated to create the PMI.

The standard methodology is that 50 marks is a neutral reading and anything higher suggests that the manufacturing economy is expanding.” However, anything lower than 50 marks also means that the economy is contracting.

In Nigeria, the CBN and FBNQuest have the most popular PMI measures. PMI figures are released a month in arrears though it gives you an idea of what is likely to happen in future. So technically it is called a forward indicator.

In early January, both the CBN and FBNQuest released PMI figures that raised some optimism that Nigeria’s recession may have hit the bottom.

The CBN PMI rose to 52.0 index points in December 2016, from 46.0 in November while that of FBNQuest came in at 60 from 48.8 in November. With both readings above 50, there was significant optimism the country’s economic contraction, especially in the manufacturing sector has reached the bottom and so the economy will start experiencing some growth again.

Even though sceptics had warned then that the December rebound in PMI was just a one off effect that was brought about by manufacturers stocking up inventory in anticipation of increased end of year demand for goods.

The release of January PMI figures by the both the CBN and FBNQuest have proven that the sceptics may have been right. Both PMI figures are back in negative territory, which is an indication that the manufacturing sector is still suffering.

The CBN PMI has declined to 48.2 marks in January 2017 from 52.0 in December 2016 while that of FBNQuest has also declined steeply to 48.6 marks from the high of 60 marks in December 2016.  What this says is that manufacturers are not confident about the outlook for the economy. And because they are not confident, they are not likely to invest money in expansion of their operations, and if they are not expanding, they are going to employ less number of people or in some case cut down on even existing capacity which will mean more job losses in an economy already experiencing a high level of unemployment.

FBNQuest notes in its PMI report that all the key indicators that it tracks in the PMI, namely; output, employment, new orders, suppliers’ delivery times and stocks of purchases declined.

The CBN PMI also shows production level growing at a slower rate, new orders have declined from expansion in December 2016, supplier delivery times has deteriorated, employment level has dropped faster than in December and raw material inventories declined from expansion in December 2016.

Both the CBN and FBNQuest PMI indicators therefore show that the economy is still struggling in January. The chances of that struggle being reversed by the end of the March 2017 when the first quarter ends is slim considering the major issue faced by manufacturers is access to foreign exchange.

Even though the CBN, just sold US$660 million to manufacturers but it was clear backlog of arrears that has accumulated in 2016. The trend has also shown that manufacturers usually get just a fraction of what they demand for, so the US$660 million may just have been a fraction of their actual dollar need and will make little impact on their overall operations.

But it is not all gloom.  The struggling the manufacturing sector makes up 9.64 percent of the Nigerian economy. So a contraction in manufacturing may not necessarily drag down the growth of the economy. The oil sector has shown strong signs of revival as seen in the significant accretion to external reserves, which rose by about US$2.3 billion in January alone. The agricultural sector has also shown strong signs of growth. The growth in both of these sectors may cancel out the expected decline in the manufacturing sector and deliver some marginal growth for the Nigerian economy in the first quarter.

 

Anthony Osae-Brown