December rally eludes manufacturers as PMI drops first time in 7yrs
Manufacturers in Nigeria missed out on the seasonal boost the yuletide normally brings, as the Purchasing Managers’ Index (PMI), a gauge for manufacturing sentiments, declined from November to December for the first time in seven years, according to data by FBN Quest and NOI.
Though above the 50-point benchmark, the PMI moved from 57.4 points in November to 55.9 points in December, which was unexpected, seeing that the yuletide season often presents a periodic boost.
“The trend is usually a further increase in headline rate for December due to a seasonal boost in demand resulting from year-end festivities,” analysts at FBN Quest state in a monthly report.
Analysts say the causal effect of this performance was the outbreak of Omicron. “We attribute last month’s decline to increased uncertainty among manufacturers on the back of the fast-spreading Omicron variant of COVID-19, which was first reported to the World Health Organisation (WHO) in late November,” the report states.
Some manufacturers who spoke with BusinessDay say the variant classified as a SARS-CoV-2 “variant of concern,” by the WHO may not be easily controlled, especially as information about its transmissibility, severity, and ability to evade vaccines is unascertained.
Frank Onyebu, chairman, MAN Apapa branch, says little information being provided regarding Omicron planted seeds of doubts and uncertainty among manufacturers, with hinting possibilities of another lockdown, restricted movement, reduced production, reduced product demand as consumer’s preference adjusts, among other things.
“I understand it has a higher infectious rate but we are hopeful that it will be curtailed faster. However, the possible threat of the Omicron variant is the restriction of entry or shutdown of other countries as they try to control the spread,” Onyebu states.
Damilare Asimiyu, senior analyst at Afrinvest West Africa, tells BusinessDay that usually, manufacturers ramp up production in December to serve increased demand and also store up for January, however, the outbreak of the Omicron variant caused manufacturers to worry and also fear for the future.
“Other than Omicron, FX challenges also posed a challenge for them, especially in sourcing raw materials hence inventory was down,” he notes.
The report also reveals that supply constraints also contributed to the PMI decline in December, as manufacturers struggled to mend the cut created by the COVID-19 pandemic.
BusinessDay gathers that manufacturers in Nigeria are still struggling with the aftermath of the COVID-19 pandemic, part of which is the cut in supply of raw materials, low demand of products, particularly those categorised as being non-essential, hike in production cost, etc.
Read also: December rally eludes manufacturers
Among the five sub-indices analysed, the report notes that the most common answer in the surveys was no change, which accounted for more than 50 percent of the responses.
“The reading for new orders, the most forward-looking of the five sub-indices, declined from 62.0 to 60.5 last month, supported mainly by medium-sized firms,” it states.
The decline in demand was a blow for manufacturers who took strategic positions to effectively utilise the festive season as a quick relief for slow business activities in the course of the year.
In addition, an index that used to perform well during the review period to decline shows that the consumers’ purchasing power weakness is more intense than before.
“Incomes did not grow, inflation was high and as such what consumers could afford last year or two years ago, they are not able to afford again,” Ayodele Akinwunmi, senior relationship manager, corporate banking group, FSDH Merchant Bank, says.
The economic downturn during the pandemic led to rising unemployment, high prices, and decreasing disposable incomes among many Nigerian households last year and these negative impacts continued in 2021.
According to a report by the Presidential Economic Advisory Council (PEAC), Nigeria’s unemployment rate of 33.3 percent is projected to increase further by 7 percentage points to 40 percent by the end of 2021, which it says will largely be driven by the low capacity of the manufacturing sector.
Experts say the PMI is a forward-looking indicator of economic activities; hence they project that the GDP for the fourth quarter of 2021 may perform sub-optimally.
“We are looking at the possibility of achieving 1.0 percent to 1.5 percent because the activities of the season will not reflect on the numbers,” Babajide Babatope, an economic expert tells BusinessDay
He says precedence has shown strong growth in the fourth quarter of the year, however, for 2021, the data provided may not match the reality.
He further relates this to inflation figures which had continuously decelerated since April 2021, yet the prices of items have risen incessantly by more than 50 percent.
Similarly, Asimiyu notes that due to the events that shaped 2020, the Q4 figures will be impacted by the low-base effect of the previous year, hence projections will fall between 2.3 percent and 2.7 percent.
“Anything above the projected figure can happen by magic, however, sectors like services and trade will however serve as major GDP boosters,” he says.