High Costs Push Business Activity To 8-months Low

Business activities in Nigeria have fallen to an eight-month low, primarily driven by high inflation and reduced demand, according to the Stanbic Purchasing Managers’ Index (PMI).

The PMI dropped to 49.2 in July from 50.1 in June, indicating a contraction for the first time since November 2023.

Notably, output and new orders decreased, reflecting the impact of rising prices on customer commitment to new projects.

Despite this downturn, the manufacturing sector showed resilience, with increased activity.

Analysts predict potential relief in the second half of the year as harvest season approaches and inflationary pressures may ease.

The latest monthly PMI by Stanbic IBTC Bank showed the headline index declined to 49.2 in July, down from 50.1 in June and below the 50.0 no-change mark for the first time in eight months.

According to the report, input costs and selling prices continued to rise rapidly, although there were some signs that efforts to secure sales resulted in a softer pace of output price inflation.  Meanwhile, confidence hit a new record low.

It said Anecdotal evidence continued to highlight the negative impact of sharp price increases on customer demand, with clients often unwilling or unable to commit to new projects.

“Three of the four broad sectors covered by the report saw business activities decrease in July, the exception being manufacturing where production increased,” the report stated.

According to the report, selling prices continued to increase sharply at the start of the third quarter as companies passed higher input costs through to their customers.

It said this was despite the rate of inflation easing to the slowest since May 2023 amid reports from some analysts that they had lowered charges as part of efforts to secure more projects.

“Some companies lowered charges as part of efforts to attract customers. That said, companies remained confident overall that output will increase over the next 12 months, reflecting business expansion plans including efforts to start exporting and open more branches,” Muyiwa Oni, head of Equity Research West Africa at Stanbic IBTC Bank.

Oni said on a year-on-year basis, headline inflation may have peaked in June, with moderation expected in the second half of 2024 as the year-on-year effects of PMS subsidy removal (which induced higher fuel prices) and significant currency depreciation (which accompanied the FX unification) fade.

The report stated that further increases in purchase prices and staff costs were registered in July.

“Purchase price inflation quickened to a four-month high, often due to currency weakness but also higher raw material costs.”

Meanwhile, it noted that the rise in employee expenses was broadly in line with that seen in June as companies continued to help workers with higher living costs, particularly those related to transportation.

“The renewed decline in output was accompanied by a reduction in business confidence, with firms at their least optimistic since the survey began,” the report said.

The PMI index, which measures the performance of the private sector, is derived from a survey of 400 companies from agriculture, manufacturing, services, construction and retail sectors.

It is a composite index based on five individual indexes with the following weights: new orders (30 per cent), output (25 per cent), employment (20 per cent), suppliers’ delivery times (15 percent), and stock of items purchased (10 per cent), with the delivery times index inverted so that it moves in a comparable direction.