The Stanbic IBTC Bank Nigeria Purchasing Managers’ Index™ (PMI®) for February indicated a sharp increase in input costs, reaching unprecedented levels in over a decade of data collection. This surge in prices not only impacted businesses’ bottom lines but also affected demand, leading to a slowdown in both output and new orders. The headline PMI dropped to 51.0 from 54.5 in January, marking the weakest improvement since the private sector’s recovery began in December.
The primary driver behind this escalation in costs was the weakening of the exchange rate, which resulted in higher material expenses alongside increased fuel prices. Approximately 78% of respondents reported a rise in overall input costs, marking the sharpest increase since the survey’s inception in January 2014. As a consequence, firms were compelled to pass on these rising costs to consumers, leading to a record-high inflation rate for output prices.
Despite some positive signs of underlying demand, new business expansion slowed significantly, particularly in manufacturing and wholesale & retail sectors. Muyiwa Oni, Head of Equity Research West Africa at Stanbic IBTC Bank, noted that the moderation in PMI was in line with local currency depreciation, fuel price hikes, and soaring food costs, which collectively drove overall cost pressures. Concerns arise regarding the potential impact of these lingering pressures on domestic demand, possibly limiting growth prospects in the first quarter of 2024.
The heightened cost environment also prompted companies to reduce staffing levels for the first time in ten months, albeit marginally, while purchasing activity was scaled back. Despite these adjustments, firms managed to keep up with workloads and even reduced outstanding business for the first time in three months. However, a desire to respond to new orders swiftly led to continued inventory increases, indicating cautious optimism regarding future demand.
Business confidence plummeted to the lowest level on record in February, reflecting the unprecedented inflationary pressures and signs of softening demand. Nevertheless, firms remained optimistic about the year-ahead outlook, citing expansion plans and hopes for improved economic conditions.
The combination of record-high input costs, slowing demand, and declining business confidence poses challenges for the Nigerian private sector. As businesses navigate through these uncertainties, policymakers may need to explore measures to mitigate inflationary pressures and support sustainable economic growth in the coming months.