Business activity in Nigeria has plunged to its lowest level in eight months, driven by intense cost pressures that have significantly dampened demand. The latest Purchasing Managers’ Index (PMI) report, released by Stanbic IBTC Bank, revealed that both business activity and new orders experienced a decline in July as companies struggled with the rising cost of operations.
The PMI report for July shows that the headline index dropped to 49.2, a notable decrease from 50.1 in June. This marks the first time in eight months that the index has fallen below the 50.0 mark, which is the threshold that separates growth from contraction in business activity. The decline is a clear indication that businesses across Nigeria are grappling with the economic challenges posed by escalating costs.
According to the report, input costs and selling prices continued to rise rapidly throughout July, contributing to the overall decrease in business activity. Despite some efforts by companies to manage these costs and attract customers, the pace of output price inflation showed only a modest reduction. The rising costs have not only squeezed profit margins but have also led to a sharp decline in business confidence, which hit a new record low during the month.
The report highlighted that businesses are feeling the impact of sharp price increases, which have significantly reduced customer demand. Many customers are now unwilling or unable to commit to new projects due to the higher costs, which has led to a reduction in both new orders and overall business activity. The report notes that three out of the four broad sectors covered by the survey saw a decrease in activity in July. The only exception was the manufacturing sector, where production managed to increase despite the challenging economic environment.
The ongoing rise in selling prices at the start of the third quarter reflects companies’ attempts to pass on higher input costs to their customers. This has been a necessary step for many businesses to maintain their operations in the face of rising expenses. However, even as the rate of inflation slowed to its lowest level since May 2023, some companies made the strategic decision to lower their charges in an effort to attract and retain customers.
Despite these challenges, companies remain cautiously optimistic about the future. The report indicated that businesses are confident that output will increase over the next 12 months. This optimism is driven by business expansion plans, including efforts to start exporting goods and services and to open more branches. Muyiwa Oni, Head of Equity Research West Africa at Stanbic IBTC Bank, noted that while headline inflation may have peaked in June, a moderation in inflation is expected in the second half of 2024. This anticipated moderation is based on the year-on-year effects of the removal of the Premium Motor Spirit (PMS) subsidy, which led to higher fuel prices, and the significant currency depreciation that followed the unification of exchange rates.
The report also pointed to further increases in purchase prices and staff costs in July. Purchase price inflation accelerated to a four-month high, driven primarily by currency weakness and higher raw material costs. The rise in employee expenses remained consistent with the levels seen in June, as companies continued to provide additional financial support to their workers to help them cope with the increasing cost of living, particularly in areas like transportation.
The renewed decline in output was accompanied by a notable drop in business confidence, with companies reporting the lowest levels of optimism since the survey began. This decline in confidence reflects the growing uncertainty within the private sector as businesses navigate the challenging economic landscape.
The Purchasing Managers’ Index (PMI), which measures the performance of the private sector, is derived from a survey of 400 companies across various sectors, including agriculture, manufacturing, services, construction, and retail. The index is a composite measure based on five key indicators: new orders, output, employment, suppliers’ delivery times, and the stock of items purchased. The delivery times index is inverted to ensure it moves in a comparable direction with the other indicators.
The significant drop in the PMI index underscores the difficulties that businesses in Nigeria are currently facing. With the ongoing rise in costs, companies are finding it increasingly challenging to maintain their operations and profitability. The pressure on businesses is further compounded by the broader economic environment, which has been marked by high inflation, currency volatility, and a sluggish recovery from the impacts of the COVID-19 pandemic.
For many businesses, the current economic climate has forced them to make difficult decisions, including reducing output, scaling back expansion plans, and in some cases, cutting jobs. The decrease in new orders, as reported in the PMI, suggests that demand is weakening, which could lead to further reductions in business activity in the coming months.
The impact of these challenges is being felt across all sectors, with the exception of manufacturing, which managed to increase production in July. However, even in the manufacturing sector, the gains are modest and may not be sustainable if the broader economic conditions do not improve. The continued rise in input costs, particularly those related to raw materials and labor, is a major concern for manufacturers, who are struggling to pass on these costs to consumers without losing market share.
