Stanbic IBTC Bank Nigeria PMI®: Output Remains Stagnant, Yet New Orders Show an Upward Trend

However, firms faced significant challenges due to sharply increasing input costs, with inflation rates accelerating since July. Consequently, businesses raised their selling prices at a quicker rate. The primary indicator from the survey is the Stanbic IBTC Purchasing Managers’ Index™ (PMI®), where readings above 50.0 indicate an improvement in business conditions compared to the previous month, and readings below 50.0 reflect a decline.

The PMI rose to 49.9 in August from 49.2 in July, remaining just below the neutral threshold of 50.0, which suggests a generally stable environment for business conditions in Nigeria's private sector. The stagnation in overall operational conditions aligned with a slight decrease in business activity for the second month in a row. 

Companies noted that demand remained subdued amid persistent inflationary pressures, although there were some positive developments as new orders began to grow again. New business saw a slight uptick, reversing the decline observed in July, but the growth rate was significantly lower than the historical average. New orders increased in three of the four sectors monitored, with the exception of services. Employment continued to rise, marking the fourth consecutive month of job creation.

 Muyiwa Oni, Head of Equity Research West Africa at Stanbic IBTC Bank, stated that Nigeria's headline PMI saw a slight increase to 49.9 points in August, up from 49.2 in July. However, it remained just below the neutral threshold of 50.0, indicating a generally stable environment for business conditions within the Nigerian private sector. 

The stagnation in overall operating conditions aligned with the trend in business activity, as Nigerian firms experienced a minor decline in business activity during August, similar to the situation in July. While some companies benefited from a renewed expansion in sales and subsequently increased their output, others faced weak demand amid significant cost pressures. Activity levels improved in the manufacturing and wholesale & retail sectors, but declined in agriculture and services. 

Regarding purchase prices, respondents reported rising costs for materials, particularly animal feed and paper, with logistics and transportation also contributing to inflation due to higher fuel prices. Some participants highlighted the weakness of the USD/NGN exchange rate. Additionally, the rate of output price inflation accelerated to a five-month high in August, with nearly half of the respondents indicating an increase in charges. 

This rise in output prices was attributed to the transfer of higher costs to consumers. The Nigerian economy recorded a year-on-year growth of 3.19% in Q2:24, up from 2.98% in Q1:24, driven by a significant increase in the oil sector's growth, which was nearly double that of Q1:24. In contrast, the non-oil sector remained stagnant at 2.80% year-on-year, consistent with Q1:24.

The ongoing challenges in the non-oil sector are largely due to high interest rates, persistent inflationary pressures, and depreciation of the local currency.

The Services sector continues to be the primary driver of economic growth, accounting for 69.3% of the real GDP growth rate, a decrease from 83.2% in Q1:24. In comparison, Industries and Agriculture contributed 20.5% and 10.2% to real GDP growth, respectively. 

Despite this, the contribution of the information and communication technology (ICT) sector, a significant component of Services growth, has been declining since Q3:23. On a positive note, the oil sector's performance has been offsetting these declines, maintaining the overall economy's growth trajectory at 2.5-3.2% year-on-year. Looking ahead to H2:24, a projected decrease in headline inflation is expected to support domestic demand. However, high interest rates and the depreciation of the local currency pose challenges for the non-oil sector. 

Additionally, sluggish growth in internet and telephone subscribers may continue to limit the ICT sector's expansion, despite rising data traffic. Overall, we maintain our growth forecast for 2024 at 3.1%.

The recent increase in staffing levels, while modest, marked the fastest growth since last November. This rise, coupled with subdued new order inflows, allowed companies to reduce their work backlogs at the quickest rate observed since June 2022. 

Midway through the third quarter, input costs surged once again, with the rate of purchase cost inflation reaching a five-month peak due to rising material and transportation prices, further intensified by currency depreciation. Additionally, staff costs rose as businesses raised wages to address escalating living expenses. Many companies transferred these higher input costs to customers, resulting in output prices climbing at the most rapid pace in five months. 

The combination of soaring material costs and weak demand prompted firms to cut back on purchasing, leading to a decline in input inventories for the first time in 17 months. This inventory reduction was among the most significant on record, excluding the months impacted by the COVID-19 pandemic. 

At the same time, supplier lead times continued to decrease. Companies remained optimistic about future output growth due to their expansion plans, although sentiment, while improving from July's historic low, still ranked among the least optimistic since the survey's inception.