Manufacturing PMI Slips Back to Contraction amid Insecurity, Rising Inflation…

Recently released Purchasing Managers’ Index (PMI) survey report by Central Bank of Nigeria (CBN) showed that the manufacturing sector slipped back into contraction from an expansion of 50.2 points in November 2020. Also, the nonmanufacturing sector further contracted, departing faster from the 50 index points (which indicates neutrality), as new orders and business activities weakened amid rising inflation rate, worsening insecurity and the scare of the second wave of COVID-19 pandemic. Specifically, the manufacturing composite PMI fell to 49.6 index points in December (from 50.2 in November).

The contraction in manufacturing composite PMI was partly driven by a marginal decrease in both production and new order indices to 51.6 and 50.2 respectively in December 2020 (from 51.7 and 50.5 respectively in November 2020).

Given the rising inflation rate, producers’ costs of production increased sharply (input prices index rose to 73.0 from 71.7), which also triggered the increase in manufactured products as manufacturers marked up their selling prices in order to pass on the cost to consumers (output prices index increased to 61.4 from 60.1). Supplies of raw materials to manufacturers were delayed a bit despite slower production level – supplier delivery time index declined to 51.2 in December (from 52.2 in November).

Hence, manufacturers’ stock of raw materials dwindled – raw materials/work-in-progress index moved down, to 46.9 from 48.5 – reflected by the quantity of purchases index which moderated to 49.0 from 51.7. As producers were demotivated by lower patronage, we saw the stock of finished goods fall – its index increased to 42.7 points in December 2020 from 46.6 points in November 2020. Similarly, staffing levels in the manufacturing space further contracted given the decrease in production volume – employment index dropped further to 46.3 points in December (compared to 47.3 points in November).

Of the fourteen manufacturing subsectors, Cement, Furniture & related products, Plastics & rubber products and Printing & related support activities sub-sector indices fell into contraction to 43.8 points (52.6 points), 49.8 points (55.8 points) and 48.4 points (50.1 points) respectively in December 2020. However, the Transportation equipment and Food, beverage & tobacco products sub-sectors expanded to 72.5 points (from 64.2 points) and 51.3 points (from 50.1points) respectively.

Meanwhile, the non-manufacturing sector printed faster contraction as its composite PMI decreased to 45.7 index points in December 2020 (from 47.6 index points in November 2020). This was chiefly driven by weakened business activity and incoming business indices to 46.9 (from 50.5) and 45.1 (from 46.9) respectively.

Also, the employment index decreased, to 45.1 (from 46.7). Business activity fell due to the rise in the average price of inputs, to 54.7 index points in December (from 54.5 index points in November). Elsewhere, the West Texas Intermediate (WTI) crude price rose marginally by 0.50% w-o-w to USD48.06 a barrel given the 1.95% w-o-w the rise in US crude oil input to refineries to 14.29 mb/d as at December 25, 2020 (however, It declined y-o-y by 15.45% from 16.89 mb/d as at January 1, 2020).

The U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell by 1.21% w-o-w to 493.47 million barrels as at December 25, 2020 (albeit, inventories rose by 14.48% y-o-y from 431.06 million barrels as at January 1, 2020).

The growing concern about the second wave of COVID-19 pandemic may mount pressure on the government to take precautionary measures which could have more economic implications. Also, given the slip back in the PMI figures, we expect the Gross Domestic Product (GDP) growth in Q4 2020 to come in weak. Hence, Nigerian economy may not be “out of the woods” yet, even in Q1 2021, as cost-push inflation may persist amid worsening insecurity.