PMI index sinks to record-low 49.2 as inflationary pressures hammer business optimism

Business a.m.

Nigeria’s private sector saw a decline in business confidence during July, with the Stanbic IBTC Bank Purchasing Managers Index (PMI) dropping to a record low of 49.2 from the previous month’s 50.1. This marks the first time in eight months that the PMI has fallen below the 50.0 no-change mark, signifying a plunge in private-sector operating conditions relative to the previous month. 

The negative overall trend was largely attributed to steep price pressures, which negatively affected demand and business activity.

As highlighted in the July PMI report, readings above the 50.0 threshold indicate an improvement in business conditions from the previous month, while readings below this level signal a deterioration. The recent PMI reading for July, which fell below the neutral 50.0 level, indicates a drop in business conditions as the second half of the year kicked off. 

According to the PMI analysis, this downward shift in the index points to a reduced performance among private-sector companies in Nigeria, as rising costs and reduced demand impacted their ability to maintain growth and profitability.

The July PMI report revealed that input costs and selling prices continued to increase at a rapid rate, though the pace of output price inflation eased somewhat as companies sought to secure sales by moderating their prices. Nevertheless, the slight deterioration in the overall health of the Nigerian private sector was primarily attributed to the first declines in output and new orders since November 2023.

Despite a slight easing in the rate of inflation since May 2023, selling prices in the Nigerian private sector continued to rise sharply at the beginning of the third quarter as companies sought to offset their higher input costs by passing them on to customers. 

Some panelists reported that they had reduced their charges in an effort to boost sales, yet the overall trend remained upwards, indicating ongoing cost pressures across the sector. Moreover, July witnessed further price increases in purchases and labour expenses, maintaining a pattern of higher expenses for Nigerian businesses. 

The July PMI report indicated that purchase price inflation rose at its fastest rate in four months, largely due to currency devaluation and increased raw material costs, adding to the mounting financial pressures on private-sector companies in Nigeria. In a bid to support their employees amidst the rising cost of living, particularly transportation costs, many companies continued to bear the brunt of higher employee expenses, mirroring the levels seen in June. 

The decline in output and business confidence across the Nigerian private sector during July was concurrent, with companies exhibiting the lowest levels of optimism since the commencement of the survey. To align with reduced demand, businesses cut back on their purchasing activity, resulting in shorter delivery times from suppliers and an accumulation of inventories.

 Although the overall economic landscape in Nigeria remained challenging during July, private-sector companies experienced a mild increase in employment, with the rate of job creation reaching its highest point in 2024 thus far. While this uptick in employment may indicate a positive trend, it was also coupled with reduced new orders, leading to a drop in backlogged work for the second month in a row. 

 As Muyiwa Oni, head of equity research West Africa at Stanbic IBTC Bank, observed, the Nigerian private sector’s dipped to 49.2 points, pointing to a worrying trend in the country’s economic activity. According to market feedback and anecdotal evidence, sharp price increases continued to negatively impact consumer demand, leading to reductions in both business activity and new orders.

Oni explained, “Overall input prices continued to rise sharply in July with the rate of inflation quickening for the third month running and was the fastest since March. Although output prices continued to rise rapidly during July, the pace of inflation eased from that seen in June and was the slowest since May 2023. Where selling prices increased. Panellists linked this to higher input costs.”

The head of equity research also commented on the measures some companies were taking to address the challenges posed by rising prices. While a few businesses were reported to have reduced their charges as a strategy to entice customers, overall, companies still expressed confidence in the prospects of increased output over the next 12 months. This optimism, according to Oni, was largely attributed to companies’ plans for business expansion, including initiatives to export their products and open more branches.