Nigerian business activity falls to 8-month low on cost pressures

Business activity in Nigeria fell to an eight-month low in July, with strong price pressures hitting demand and leading to a renewed decline in business activity and new orders, the new purchasing managers’ index (PMI) showed.

The latest monthly PMI released by Stanbic IBTC Bank showed the headline index fell to 49.2 in July from 50.1 in June and fell below the 50.0 neutral mark for the first time in eight months.

Input costs and selling prices continued to rise rapidly, the report said, although there were some signs that efforts to secure sales had led to a milder pace of output price inflation. Meanwhile, confidence hit a new record low.

As reported, anecdotal evidence continues to point to the negative impact of sharp price increases on customer demand, which is often unwilling or unable to engage in new projects.

“Economic activity fell in three of the four broad sectors covered by the report in July. The exception was the manufacturing sector, where output rose,” the report said.

The report indicated that selling prices continued to rise sharply at the start of the third quarter as companies passed on higher input costs to their customers.

This came despite inflation falling to its lowest level since May 2023, following reports from some panelists that they had cut fees as part of efforts to safeguard the situation.

“Some companies have lowered their fees as part of efforts to attract customers. Despite this, companies remained confident that production would increase over the next 12 months, reflecting business expansion plans, including efforts to start exporting and opening more branches,” Muyiwa Oni, Head of Equity Research West Africa at Stanbic IBTC Bank.

Oni said that year-on-year headline inflation may have peaked in June and is expected to moderate in the second half of 2024 as the effects of the abolition of PMS subsidies (which caused fuel price increases) and significant currency depreciation (accompanying currency unification) fade.

The report said purchase price and labor costs continued to rise in July. “Purchase price inflation accelerated to a four-month high, largely due to currency weakness but also higher raw material costs.”

At the same time, it noted that growth in employee spending was broadly in line with that seen in June, as firms continued to help employees cover higher living costs, particularly those related to transportation.

“The renewed decline in production was accompanied by a decline in business confidence, with companies being the least optimistic since the survey began,” the report reads.

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

This is a composite index based on five individual indicators with the following weights: new orders (30 percent), production (25 percent), employment (20 percent), delivery times from suppliers (15 percent) and stocks of purchased goods (10 percent), with the delivery times index reversed so that it moves in a comparable direction.