PMI: Sustain Contractions Foreshadow Economic Recession –Analysts
The sustained contraction of the Purchasing Managers’ Index (PMIs) for the third consecutive month in July 2020 forebodes an economic recession for the country, experts at Cowry Asset Limited have said.
Analysts explained that the index remains a good gauge of the economic temperature, and the recent data shows that economic growth would come negative.
Recently released PMI survey reported by the Central Bank of Nigeria (CBN) showed that manufacturing and non-manufacturing sectors witnessed a gradual recovery from contraction as production level and business activities picked amid improved new orders.
Specifically, the manufacturing composite PMI printed slower contraction to 44.9 index points in July from 41.1 in June, the third consecutive contraction.
Explaining the data, Cowry Asset stated that the slower contraction in manufacturing composite PMI was driven by an implied increase in new orders index.
New order index moved to 43.10 in July 2020 from 36.4 in June 2020, which resulted in higher production – the production index pointed to 44.7 from 36.6.
Producers’ costs of production increased slightly (input prices index rose to 67.6 from 67.2) and they were able to pass on costs to customers (output prices index increased to 58.6 from 53.2) given the rise in new orders.
Read Also: PFAs withdrawal, CRR Debits Tighten Financial System Liquidity
Also, supplies of raw materials to manufacturers slowed amid increasing demand from producers – supplier delivery time index fell to 56.4 in July (from 60.9 in June).
Given the delay from supplier’s end, manufacturers stocked up raw materials – raw materials/work-in-progress index moved up, to 43.2 from 41.0 – reflected by the quantity of purchases index which inched up to 39.6 from 35.8.
“We saw stock of finished goods rise – its index rose to 46.0 in July 2020 from 43.3 in June 2020 – in anticipation of increased patronage amid further relaxation of restriction on movement”, Cowry Asset said.
The investment firm stated that notably, contraction in staffing levels in the manufacturing space slowed given the increase in production volume – employment index rose to 40.0 points in July 2020 (compared to 38.8 points in June 2020).
Of the fourteen manufacturing sub-sectors, Transportation equipment sub-sector index rose to 68.3 points in July 2020 from 55.8 points in June 2020 while the non-metallic mineral products sub-sector stationed at 50.0 points from 37.1 points.
Meanwhile, the non-manufacturing sector also recorded slower contraction as its composite PMI rose to 43.3 index points in July 2020 (from 35.7 index points in June).
This was chiefly driven by improved business activity to 46.1 (from 34.3) as incoming business index rose to 43.4 from 32.5. Consequently, employment index point increased, to 41.1 from 37.4.
Incoming business still improved despite the rise in average price of inputs, to 50.9 index points in July 2020 (from 46.7 index points in June 2020).
In a related development, July 2020 business expectations survey report released by CBN showed that firms’ optimism for the month of August 2020 improved as confidence index rose to 33.7 points from 31.8 points.
Particularly, business operators in agricultural services, manufacturing, and construction were most optimistic about the macro economic outlook; even as they expect to employ more workers in August.
Meanwhile, US crude oil input to refineries further rose week-on-week by 0.27% to 14.64 million barrel per day (mb/d) as at July 31, 2020 (but lower by 17.61% to 17.77 mb/d printed in August 2, 2019).
Also, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell week on week by 1.40% to 518.60 million barrels (but higher by 18.15% from 438.93 million barrels as at August 2, 2019).
Hence, WTI crude rose w-o-w by 5.14% to USD41.97 a barrel; also, Brent crude rose by 4.39% to USD45.15 a barrel even as Bonny Light crude increased by 5.88% to USD44.82 a barrel as at Thursday, August 6, 2020.
Analysts said the sustained contraction of PMIs for the third consecutive month in July 2020 forebodes an economic recession for the country.
“However, we observed that the early monetary and fiscal intervention programmes, coupled with the progressive ease in lockdown are impacting positively on the country’s economic activity.
“Hence, we expect a faster recovery from a short-lived recession or possible aversion of the anticipated recession”, Cowry Asset stated.
PMI: Sustain Contractions Foreshadow Economic Recession –Analysts
