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Production, raw materials inventories to rise on increased government spending, consumer demand

By Femi Adekoya
08 August 2018   |   1:04 am
Pick up in government spending in line with the 2018 budget passage as well as growing consumer demand is expected to further spike production level and raw materials inventories in the real sector before the end of third quarter of this year.

Pick up in government spending in line with the 2018 budget passage as well as growing consumer demand is expected to further spike production level and raw materials inventories in the real sector before the end of third quarter of this year.

According to the latest Central Bank of Nigeria’s (CBN) Purchasing Managers’ Index (PMI) report, At 59.0 points, the production level index for the manufacturing sector grew for the seventeenth consecutive month in July 2018.

The index indicated a slower growth in the current month, when compared to its level in the preceding month. Twelve of the 14 manufacturing subsectors recorded increase in production level, while two remained unchanged.

Similarly, the Manufacturing sector inventories index grew for the sixteenth consecutive month in July 2018. At 57.4 points, the index grew at a slower rate when compared to its level in the previous month. Twelve of the 14 subsectors recorded growth, while 2 recorded decline in raw material inventories.

Experts at Cordros Capital however noted the modest slowdown in the pace of expansion in manufacturing activities, pointing out that the relationship between the PMI and GDP data has broken down recently.

“A case in sight was the weaker-than-widely-expected Q1-18 GDP numbers (including weak non-manufacturing output growth), despite record-high PMI figures during the same period. That said, for what it is worth, the latest PMI reading fuels expectation of continued output growth into the third quarter of the year.

“For insight, the reported 56.8 and 57.7 manufacturing and non-manufacturing PMIs are both higher y/y by 270 bps and 330 bps respectively. We believe stronger national output growth will be instructive for the economy over the rest of the year in two major ways: monetary policy consistency and positive corporate performance over H2-18”, they explained.

With no sufficient reasons to expect contracting PMIs over the rest of 2018, as the impact of the positive drivers supporting the encouraging figures deepens further, Cordros Capital reiterated that CBN’s sustained commitment to forex stability, rebounding aggregate demand, a pickup in government spending, in line with the 2018 budget, and strengthened consumer expectation will impact largely on the real sector’s performance.

“Particularly on forex, suffice to say that confidence remained strengthened vis-à-vis the near-term outlook of the domestic currency considering the still-healthy state of the nation’s foreign reserves, which currently stands at $47.2 billion, with oil prices staying strong at $73.3/barrel, in addition to stable crude production”, they added.

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