Private Sector Activity Slumps as Input Costs

Private Sector Activity Slumps as Input Costs Worsen

The Nigerian private sector dipped into contraction in October as a record increase in input costs impacted customer demand. Sharply rising prices also discouraged firms from purchasing inputs and caused delays in the completion of orders. On a more positive note, employment continued to rise amid company expansion plans

The headline PMI dropped below the 50.0 no-change mark for the first time in seven months in October, thereby signalling a deterioration in business conditions in the private sector. At 49.1, the index was down from September’s reading of 51.1 and signalled a slight worsening of operating conditions.

Central to the challenges for firms in October was the sharpest rise in overall input prices since the survey began almost a decade ago. Purchase costs were up rapidly, largely due to currency weakness but also the lingering impacts of the removal of the fuel subsidy.

Meanwhile, the extent of the rise in living costs, particularly those related to transportation, led companies to increase their staff pay markedly in October. Moreover, the rate of inflation hit a new survey peak.

With input costs rising rapidly, firms in Nigeria increased their own selling prices accordingly. The pace of inflation quickened from September and was one of the sharpest on record. The steep inflationary environment acted to depress customer demand in October.

New business decreased at a solid pace, thereby ending a six-month sequence of growth. Business activity was also down, falling for the second time in the past three months and to the largest extent since the cash crisis earlier in the year.

Lower new orders and high prices for inputs led companies to reduce their purchasing activity for the first time in seven months. In some cases an inability to secure inputs led to delays in the completion of projects.

Elsewhere, customers had missed payments. As a result, backlogs of work increased for the second month running, and to the largest extent since February. The build-up of outstanding business was signalled despite a further rise in employment. Staffing levels were up for the sixth month in a row, and at a solid pace.

According to respondents, job creation often reflected business expansion plans. Hopes to expand operations and open new branches meanwhile helped to support optimism in the year-ahead outlook for output, although sentiment remained historically muted.

Finally, suppliers’ delivery times shortened again in October, with improved vendor performance linked to competition among suppliers, prompt payments and relatively quiet road conditions.

Commenting on the report, Muyiwa Oni, Head of Equity Research West Africa at Stanbic IBTC Bank said, “Nigerian private sector business activity contracted in October, the first time in the last seven months, a reversal from the expansion trend since the cashless policy was discontinued in March 2023.

“Costs have continued to rise, depressing output and new orders. The headline PMI declined to 49.1 in October, from 51.1 in September, pushing business activity trend into negative territory.

“Before the September print, the PMI had declined consecutively over the past three months. Prices have remained elevated, with input and purchase prices remaining at period highs. Input prices increased materially across the major sectors covered, with inflationary pressures most pronounced in wholesale & retail and manufacturing.

“The inflationary environment depressed consumer demand in the month of October, pausing the steady pace of new business expansion for the first time in six months.  The majority of the respondents also signalled an increase in purchase prices linked mainly to exchange rate weakness and higher fuel costs. The rate of inflation hit a new peak in the survey’s history.

“September inflation print continued to show increased cost pressure as CPI increased to 26.72% from 25.8% in August. Core inflation increased to 22.1% from 21.5% in July, while food inflation increased to 30.64% from 29.34% in July.” #Private Sector Activity Slumps as Prices Increase Canada Pledges $18m For Poverty, Humanitarian Response in Nigeria