Business activity in Africa's largest economy experienced a significant decline in June 2023 due to the removal of fuel subsidies, according to the latest Purchasing Managers' Index (PMI) released by Stanbic IBTC Bank. The headline PMI remained above the no-change mark of 50.0 but dropped to 53.2 in June from the previous month's 54.0. A reading above 50.0 indicates an improvement in business conditions, while a reading below 50.0 suggests deterioration.
The report highlighted that while overall business conditions maintained a positive trajectory, companies faced a more pronounced inflationary environment at the end of the second quarter, primarily attributed to the elimination of the fuel subsidy. Purchase prices rose at the fastest pace since August of the previous year, and the rate of selling price inflation sharply increased, with firms passing on higher costs to their customers. Respondents also noted that the ending of the fuel subsidy hindered the pace of output growth, although activity still showed marked improvement. The wholesale and retail sectors, however, experienced a drop in activity.
The PMI index, which measures the performance of the private sector, is derived from a survey of 400 companies across agriculture, manufacturing, services, construction, and retail. It is a composite index based on five individual indexes, each assigned a weight: new orders (30 percent), output (25 percent), employment (20 percent), suppliers' delivery times (15 percent), and stock of items purchased (10 percent). The delivery times index is inverted to move in a comparable direction.
In May, the PMI index recorded the highest growth since the beginning of the year. However, the authors of the index noted that business confidence dropped to the second-lowest level on record in June, only slightly higher than the nadir reached in November of the previous year. Despite this decline, companies maintained optimism regarding increased output in the coming year, driven by investment, business expansion plans, and proposed marketing efforts.
In President Bola Tinubu's inaugural speech in May, he announced the removal of petrol subsidies. Within hours, fuel prices across the country surged by an average of 174.6 percent compared to their price two months prior. Presently, fuel in Nigeria is being sold at an average price of N526.7 per liter, compared to N191.8 per liter a month ago.
Muyiwa Oni, head of equity research West Africa at Stanbic IBTC Bank, explained that input prices increased at the fastest rate since August 2022, leading to higher selling price inflation as companies passed on the increased costs to consumers. Consequently, the rates of expansion in output and new orders softened during the month. Oni also expressed concerns about business confidence reaching a near-record low, prompting companies to increase inventories in anticipation of further price increases.
Data from the National Bureau of Statistics indicated that Nigeria's headline inflation rate rose for the fifth consecutive time in May, reaching 22.41 percent compared to 22.22 percent in the previous month. It is expected to continue climbing in June. Oni warned that the significant increase in petrol pump prices, averaging 176 percent nationwide, may further contribute to transport inflation, as petrol is a key component for major transportation vehicles within the country. He forecasted inflation to reach 27.5 percent by the end of the year.
In response to rising living costs amid low-income levels, CSL Research analysts stated that consumers have been trading down on the value chain and shifting to cheaper alternatives. They also anticipated a tightening of consumer spending and low demand due to the expected rise in inflation following the currency depreciation.
