Nigeria’s June Manufacturing PMI Expands Slower to 57.4 Points as Slower Economic Growth Seen in Q2

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Freshly released Purchasing Managers’ Index (PMI) survey report for June 2019 showed slower expansions in both the manufacturing and non-manufacturing businesses amid slower growth in new orders and business activity which might partly be adduced to the delay in the implementation of minimum wage in the country.

According to the survey, the manufacturing composite PMI expanded to 57.4 index points in June 2019 (albeit slower compared to 57.8 in the preceding month), the twenty seventh consecutive expansion. The decline in manufacturing composite PMI was driven by slower expansion in new orders to 55.9 in June 2019 (from 56.9 in May 2019) as producers increased selling prices – output prices expanded faster, to 52.4 (from 52.3), which was induced by higher cost of raw materials.

Despite the increase in raw material prices – input prices rose to 62.7 in June 2019 (from 62.2 in May 2019) –, producers still increased their prouction ouputs as production level index moved up to 59.3 (from 59.1). Amid higher production level, raw materials/inventories rose, albeit at a slower pace – work in progress/inventory index fell to 55.0 in June 2019 (from 56.8 in the preceding month) – despite the increase in quantity of raw materials purchased – quantity of purchases index rose to 52.1 (from 51.5).

Similarly, increased hires were recorded by manufacturers as more workers were engaged for production purpose – the index for employment rose to 57.5 points in June 2019 (compared to 57.3 in May 2019).

Of the fourteen manufacturing sub-sectors surveyed, five sub-sectors (or 35.71%) recorded faster expansions (lower than six (42.86%) in the preceding month). Specifically, manufacturers of ‘Chemical & pharmaceutical products’, ‘Printing & related support activities’ and ‘Fabricated metal products’ registered the sharpest expansion in activities of 60.1 (from 59.3), 57.4 (from 50.1) and 57.3 (from 56.0) respectively.

Also, the non-manufacturing sector somewhat cooled on its fast growth trajectory as the non-manufacturing composite PMI expanded slower to 58.6 index points in June 2019 (from 58.9 index points in May 2019), the twenty sixth consecutive expansion. This was partly driven by slower expansion in business activity to 58.2 (from 58.6).

This necessiated the drop in inventory and employment level to 58.8 (from 59.3) and 58.3 (from 58.5) respectively. However, incoming business expanded faster to 59.2 (from 58.2) despite the increase in average price of inputs which increased to 52.1 (from 51.3).

Of the seventeen manufacturing sub-sectors surveyed, eight sub-sectors (or 47.06%) recorded faster expansions (lower than ten (58.82%) in the preceding month).

Notably, service providers of ‘Water supply, sewage & waste management’ and ‘Utilities’ registered the sharpest expansion in activities of 70.5 (from 54.2) and 65.6 (from 55.0) respectively.

Meanwhile, the Federal Government of Nigeria (FG) as part of plans to shore up falling revenue concluded to raise Value Added Tax (VAT) by 50% to 7.5% from the current 5% in the year 2020.

According to the former Minister of Finance, Zainab Ahmed, labour and FG have agreed to partly fund the increase in minimum wage with marginal increase in VAT. Also, she stated that it was part of the strategic revenue growth initiative planned by FG to increase revenue by 80-85% in the next three years.

The slower expansion in new orders, driven by rising selling prices and inducing sluggish expnasion of PMI in H1 2019, is a clear indicator of the possiblity of slower economic growth in Q2 2019 in line with our earlier prediction (see our CWR May 31, 2019 economic outlook).

Going forward, given the Federal Government’s intended 50% increase in VAT in 2020, we opine that its resultant negative impact on purchasing power, via increase in selling prices, could limit the objectives of the soon-to-be implemented increase in minimum wage. We therefore expect further widening of the tax net to capture informal economic activities in order to increase public sector revenue.

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