• Tuesday, December 05, 2023
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Purchasing index indicates steady expansion in manufacturing


Nigeria’s purchasing managers index (PMI), an indicator for economic activity, has in the past five months, risen steadily, which indicates a good measure of expansion in the manufacturing sector, according to FBN Capital.

The FBN Capital PMI released Monday, showed a reading of 53.8 for May, falling from the 59.6 posted in April. However on aggregate note, the PMI’s for the first five months of the year were well above the 50 mark, which is the dividing line between growth and contraction.

The Purchasing Managers Index is released on the first day of the month, and it reflects percentage of purchasing in a month, while measuring five factors in business: new orders, inventory levels, production, supplier delivers, and employment conditions. Each of these five factors are adjusted and weighed according to time of year and other events.

A PMI over 50% means that manufacturing is growing and expanding. A PMI under 50% means that manufacturing is declining. A PMI of 42.7% or more over a long period of time means the economy as a whole is expanding. A PMI of 42.7% or below, over a long period of time means the economy as a whole is contracting.

“The readings in May for employment and stocks of purchases were broadly flat, while those for output, new orders and delivery times showed healthy improvement,” FBN capital analysts, led by Gregory Kronsten, said in a note released Monday.

“Manufacturing growth has been steadily picking up, to 8.4 percent year on year (y/y) in the first quarter of 2013 from 5.2 percent one year earlier.”

Manufacturing which accounts for about 10 percent of the Nigerian economy, has been finding support

recently as the demographic growth and rising incomes spur demand for FMCG, cement , appliances and home-decor items.

Nigeria’s economy is anticipated by the IMF to grow at an average of 6.8 percent annually between 2012 and 2017.

Over the past decade, GDP per capita has risen from $379 to $1,452; driving a stronger demand for consumer goods and the capacity for increased local production is increasingly being put in place by companies to meet the growing demand.

Manufacturing stocks have mostly outperformed in 2013 as profits of blue-chip industrial companies at the Nigerian Stock Exchange (NSE) spiked in the fourth quarter of 2012, helping to boost full year profits.

The stock price of Dangote Cement , Nigerian Breweries, and Nestle Nigeria, which have all added increased manufacturing capacity or announced plans to do so , have risen by 57.6 percent , 19 percent and 44 percent year to date.

The wider NSE all share index is up 38 percent year to date, by comparison. The PMI index is based on the responses of a number of manufacturing companies to set questions on core variables in their businesses.

In the FBN capital model, purchasing managers are asked whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved, are unchanged or have declined.

In the case of delivery times, the question is inverted and shorter times are a positive, while respondents are asked to take seasonal factors into account.

The sample is a representative blend of large, medium-sized and small companies in the sector, with the elevated volatility in the reading for May, compared to April, justified due to Nigeria’s less developed market status.

“We would expect much greater swings in frontier than developed markets, due to regular changes in the operating environment such as electricity provision and the tariff regime, and the climate of policy uncertainty,” Kronsten said.

CBN Governor Sanusi Lamido Sanusi said on Monday the Central Bank may raise the benchmark interest rate if government spending increases before elections in 2015, which could put a brake on the expansion of the manufacturing sector.

Nigeria’s inflation rate accelerated to 9.1 percent in April from 8.6 percent in the previous month, according to the National Bureau of Statistics (NBS).

The PMI is a familiar data release at the start of the calendar month in developed markets such as the US and Germany, as well as the larger emerging markets like China, Brazil and South Africa.