Nigeria’s PMI dips as inflation weighs on business conditions

Onome Amuge

Nigerian businesses continued to be negatively impacted by strong inflationary pressures, with the latest Purchasing Managers’ Index (PMI) showing declines in new orders and output as customers were either unwilling or unable to pay higher prices in November.

The latest PMI report, released by Stanbic IBTC Bank, showed that the headline index fell to 48.0 in November 2022, the lowest level in eight months, down from 49.1 in October. This was the second month in a row that the index indicated contraction in Nigeria’s private sector. 

A PMI reading above 50.0 indicates improvement in business conditions, while a reading below 50.0 indicates deterioration. According to the report, the declines were primarily driven by contractions in output, new orders, and employment. Companies cited weak demand, rising prices, and a deteriorating economic climate as factors behind the decline.

The declines in output and new orders were largely attributed to the impact of steep price rises on customer demand, as reported by companies in the survey. In November, companies in the survey raised their selling prices at a rapid pace, with the rate of inflation slowing only slightly and remaining among the highest ever recorded. Close to half of all companies in the survey raised their prices during the month. Firms reported that they had also passed on increased costs of raw materials and other inputs to their customers. The report noted that selling prices were generally raised in an attempt to protect profit margins

According to the report, the increased selling prices were primarily in response to the sharp rise in input costs, which accelerated to a nearly two-year high due to the depreciation of the Nigerian naira and increased costs for fuel and raw materials. 

The report highlighted that, while input costs rose rapidly, firms reported stronger output charges, as they were able to pass on higher costs to customers. However, the pass-through of costs to customers did not fully offset the impact of cost inflation on profit margins, as companies continued to face rising labour costs and other expenses.

“At 48.0 in November, the headline PMI remained below the 50.0 no-change mark for the second month running midway through the final quarter of the year,”it  added.

The report showed that the overall deterioration in business conditions was largely driven by further declines in output and new orders, both of which fell for the second consecutive month and to a greater extent than in October. Output decreased particularly sharply among wholesale and retail companies, while the agriculture sector was the only one to post an increase in output. New orders declined in November, with some firms blaming high inflation, a difficult economic climate, and client financial problems. In addition, order books were depleted across all four monitored sectors, with construction the worst-performing.

The PMI index is based on a survey of 400 companies from five sectors: agriculture, manufacturing, services, construction, and retail. The index is a composite of five individual indexes, with the following weights: new orders (30%), output (25%), employment (20%), suppliers’ delivery times (15%), and stocks of purchased items (10%). The delivery times index is inverted so that it moves in the same direction as the other four indexes. The survey results are used to construct a diffusion index, where any reading above 50.0 indicates an improvement in business conditions, while a reading below 50.0 indicates deterioration.