Managing with leading economic indicators

The emergence of organisations tracking leading economic indicators in Nigeria is a welcome development for business managers who have long bemoaned the absence of evidence-based data for decision making in the country. For example, the Business Confidence Index (BCI) computed quarterly by the Lagos Chamber of Commerce and Industry (LCCI) since 2014 is a leading economic indicator designed to measure the degree of optimism on the state of the economy that business leaders express through their investment and spending decisions. Decreasing business confidence is often a pointer to slowing economic activities because business owners are likely to decrease their investment. The more confident entrepreneurs and managers feel about the business environment, the more likely they are to make new investments, create jobs and positively impact the economy. Regrettably, the third quarter 2014 aggregate BCI dropped from 19.4 percent in Q2-2014 to 14.3 percent, a decline of 5.1 percent in the confidence level among business operators over the three months ending in September 2014.

LCCI reported that the index fluctuated over the first and second quarters of 2014 (10.5 percent in Q1 and 19.4 percent in Q2, 2014). The drop of the BCI scores in the third quarter meant that business leaders were largely pessimistic about expanding their investment over the next few months citing security concerns driven largely by Boko Haram insurgency.

According to LCCI, Nigeria’s BCI scores over the years have continued to trail below the 50 percent global business confidence threshold below which investors and business leaders become wary about the state of the economy and the challenging business environment.

“The key factors that mostly depressed the confidence level of business leaders at this time are security challenges across the country, political transition/electioneering activities and associated risks,” the report authors pointed out.

Business managers who rely on the BCI computed and published by LCCI now can have access to the latest manufacturing Purchasing Managers’ Index (PMI) for Nigeria compiled by FBN Capital in partnership with NOI Polls. According to FBN Capital, the PMI tracks the temperature of the manufacturing sector by asking a selection of companies their views each month on core variables in their business. By the most commonly used methodology for the compilation of PMI, 50 marks a neutral reading with anything higher suggesting that the manufacturing economy is expanding. FBN Capital uses five variables: output, employment, new orders, delivery times from suppliers and stocks of purchases. These are assigned equal weights and respondents are asked to adjust their replies for seasonal factors.

The report of the PMI for August 2014 showed a marginal decline from 56.2 in July to 54.6. The Manufacturers’ Association of Nigeria (MAN) had reported an increase in the sector’s capacity utilisation to 52.7 percent in the second half of 2013 from 46.6 percent in the comparable period of 2012.

In terms of the employment sub-index, the reading reduced slightly from 57 to 55. By far the largest number of respondents (58 percent) reported no change. Among large companies alone there was a pick-up in employment. A recent survey from MAN reportedly showed the creation of 1.58 million jobs by its members in 2013, compared with 1.07 million the previous year. Non-metallic mineral products, which include cement and ceramics, accounted for 1.18 million of the new jobs. Food, beverages and tobacco created an additional 49,000 new jobs in the year, and textiles, apparel and footwear 54,000.

Although media reports credited FBN Capital Limited with pioneering PMI in Nigeria, it is noteworthy that NOI Polls Limited has been computing a restricted manufacturing PMI for a client in Nigeria before now. It is also significant that the defunct Financial Standard Newspaper promoted by Eniola Fadayomi and other investors signed an MOU with the Institute of Purchasing and Supply in 2005 to publish a PMI but the effort did not go beyond a pilot exercise.

Predating both the LCCI’s BCI and the FBN Capital’s manufacturing PMI is the Business Leaders Perception Survey (BLPS) conducted by NOIPolls in 2009, 2010 and 2012, which listed the most critical factors limiting Nigerian businesses to include power, security, corruption and access to finance. Other factors identified from the studies included roads, water, multiple taxes and smuggling. NOIPolls conducted the BLPS in collaboration with the DFID Nigeria Programme – Enhancing Nigerian Advocacy for a Better Business Environment (ENABLE).

Also worthy of a mention is the Business Expectations Survey started by the Central Bank of Nigeria (CBN) about which little is known today.

We advise that members of the emerging community of survey professionals in Nigeria should affiliate with the Swiss-based Centre for International Research on Economic Tendency Surveys (CIRET) for quality professional development and networking across the globe.