Business activity in Nigeria plummets to 3-Month low on soaring costs

PMI declines 3.5% to 51.0 in February

Onome Amuge

A dark cloud has descended over Nigerian businesses, as rising costs and output prices have driven private sector activity down to the lowest levels in three months. The Purchasing Managers’ Index (PMI) for February 2024 showed a worrying trend, with input costs and output prices rising at their fastest rates on record. The spike in prices has driven down demand, in a worrying development for the Nigerian economy. 

The latest monthly PMI by Stanbic IBTC Bank showed the headline index declined to 51.0 in February from 54.5 in January,remaining above the 50.0 no-change mark for the third month running but only just.

The PMI is derived from the Stanbic IBTC Managers’ Index report, which is a survey of 400 companies from a variety of sectors including agriculture, manufacturing, services, construction, and retail. It provides a snapshot of the business conditions in the private sector, with readings above 50.0 indicating improvement and those below 50.0 showing deterioration.

The latest PMI report paints a stark picture of deteriorating business conditions in Nigeria. In February, the improvement in the private sector was the weakest since the economic recovery began in December of last year. Rising input costs, often driven by the depreciation of the naira, and increased fuel prices, have driven up prices across the board. According to the report, around 78 per cent of respondents indicated an increase in input costs in February, the highest percentage ever recorded in the history of the survey. 

In line with the soaring input costs, output prices have also reached an all-time high in February. Firms have been forced to pass on their increased costs to customers, leading to a sharp increase in output prices. The report notes that steep price pressures have acted as a drag on new orders in the private sector, further adding to the difficult conditions faced by businesses.

Despite a three-month sequence of growth in new business and activity, the latest PMI report indicates that the pace of expansion has slowed significantly. The weakest growth rate since December was seen in new business, with only a marginal increase in activity overall. While the agricultural and services sectors showed improvement, there was a contraction in the manufacturing and wholesale & retail sectors.

The latest PMI report indicates that the slowdown in business activity has led to a slight decline in employment levels for the first time in ten months. Though the fall was marginal, it nonetheless highlights the strain being placed on businesses by the challenging operating environment. In addition, firms have scaled back their purchasing activity, which may reflect efforts to control costs in light of rising prices.

Despite the slowdown in overall business activity,the report showed that companies are still making efforts to be responsive to new orders. This is evidenced by an increase in inventories, as businesses seek to ensure they have sufficient stock to meet customer demand. In addition, supplier delivery times continue to shorten, suggesting that supply chains are operating more efficiently.

Muyiwa Oni, head of equity research West Africa at Stanbic IBTC Bank commented that Stanbic IBTC Bank headline PMI slowed to its weakest level since Dec 23, moderating remarkably to 51.0 in Feb from 54.5 in Jan. He also noted that employment level dropped below the 50.0 no-change mark for the first time in 10 months while the output and new order’s expansion both weakened significantly in the month. 

“These weaknesses were in line with the sharp local currency depreciation, increase in fuel prices, and rapidly rising food costs in February, thereby driving overall cost pressures in the month. These lingering pressures may push domestic demand low, limiting growth potentials in Q1:24,” Oni explained.