By Vetiva Research
Purchasing Managers’ Index (PMI) readings for July showed a steady expansion across both manufacturing and non-manufacturing sectors. Manufacturing PMI registered at 54.1, up from 52.9 in June whilst Non-Manufacturing PMI registered at 54.4, up from 54.2 in June.
Economic recovery held up in July even amidst a high cost and high interest rate environment, as greater foreign exchange (FX) liquidity and improving business sentiment propped up economic activities.
Strong July improvement contrasts 2016 experience
In July, the manufacturing sector expanded at the quickest pace on record, driven by record growth in production level (59.3) and accelerations in the other four sub-indices.
Drilling down, a third successive improvement in Employment Levels in July (51.8) indicates that increasing economic activity is slowly absorbing more labour.
The improvement in Non-Manufacturing PMI in July was driven by stronger expansions in New Orders (55.1), Employment Levels (54.0), and Inventories (51.9). Though the pace of expansion in Business Activity slowed in July (56.8), it still came in stronger than the other sub-indices.
We note that exactly a year ago, July 2016 was an uncertain period for the economy given fairly recent changes to fuel prices, foreign exchange policy, and interest rates.
Contrastingly, July 2017 was a particularly strong month for the non-manufacturing sector; all four sub-indices expanded (all four declined in July 2016) whilst all but two of eighteen sub-sectors expanded during the month, compared to July 2016 when only the agriculture sector registered growth.
Notwithstanding this improvement, we highlight that 2017 figures are coming off a weaker base as a result of the recessionary environment from Q2’16 to at least Q1’17, which suggests that there is still substantial recovery headroom.
Key feature: Price pressures on the wane?
The Nigerian economy continues to suffer from intense inflationary pressures emanating from higher food prices, transport costs, and prior currency devaluation.
Prices remain under pressure, but the pace of increase is the slowest since February 2016, a month when inflation spiked on increased electricity tariffs. Whilst we maintain a bearish outlook for inflation, continued stability in the FX and energy markets should marginally assuage cost-push inflation.
Fiscal policy should supplement recovery drivers
July PMI figures showing continued improvements in Real Estate (52.6) and Trade (52.5) bode well for the general economic landscape.
Headline economic growth is likely to be driven by steady agriculture growth and a recovery in oil volumes, but fiscal stimulus is required to drive inclusive economic recovery.
On this note, a more efficient rollout of Social Intervention Programs, along with capital expenditure disbursements from the 2017 Budget, are crucial for boosting underlying aggregate demand.