Business Undeterred by Sluggish Q1 Performance

us businessA grinder is used to smooth the edges of pieces of steel used in lighting fixtures at Kevin Reilly Enterprises in Montgomery, Alabama, U.S. Photographer: Dave Martin
  • Business Undeterred by Sluggish Q1 Performance

Amid a sluggish economic performance in the first quarter of 2017, the Business Confidence Monitor indicated growing confidence among businesses operating in the country.

While the exit timeline from the current economic recession continues to generate debate among different stakeholders, indications of an increasing confidence level in the economy among businesses operating in different sectors of the nation’s economy have begun to emerge, according to The Business Confidence Monitor (BCM) that was released last week by the Nigerian Economic Summit Group (NESG).

The report obtained revealed that indices for the leading business indicators reviewed such as production, operating profit and employment were at positive readings of 9.8, 8.2 and 4.7 respectively. On the other hand, cost of doing business and access to credit indices stood at negative trajectories of -41.3 and -23.7 respectively, even though senior managers and business executives polled in the survey demonstrated optimism of better performance in the next two quarters.

The report obtains qualitative information on the current state of businesses’ sentiments within the Nigerian economy and gauges expectations about the overall economic activities in the short-term and is anchored on business managers’ optimism on key leading economic indicators such as investment, prices, demand conditions, employment etc.

The report findings are categorised under four themes, namely business conditions and performance in Q1-2017, future business sentiments, factors militating against business performance and overall BCM outlook in Nigeria. Indices of performance, expectation and overall outlook were reported both on aggregate and sectoral bases.

According to the Head of Research NESG, Dr. Olusegun Omisakin, “The BCM provides policy makers, business managers, investors, and analysts, with information about current conditions that are representative of the direction of the Nigerian economy. Additionally, it offers strong guide of the overall direction of the economy, it illustrates what is driving change and highlights the key concerns of businesses for policy makers,” he stated.

Sectors Covered

The economic sectors in the report cut across the different sector of the nation’s economy such as Manufacturing, including food, beverage and Tobacco; Textile, Apparel and Footwear; Cement; Chemical and Pharmaceutical Products; Plastic and Rubber products; Wood and Wood Products; Pulp, Paper and Paper Products; Non-Metallic Products; Electrical and Electronics; Basic metal, Iron and Steel; Motor vehicles and assembly and Other Manufacturing.

The sectors also included services such as Telecoms and Information Services; Broadcasting; Financial Institutions; Real Estate; Professional, Scientific and Technical Services. Others are Non-Manufacturing Industries such as Crude Petroleum; Natural Gas, Oil and Services; Construction, as well as wholesale trade and retail trade.

Business in Q1 2017

Analysis from the report showed that on average, more businesses performed poorly between January and March 2017. The BCM’s Business Condition Index exhibits a slight dip in Q1, standing at a net balance of -5.4. Beyond the tendency for economic inertia in every first quarter, the result is a case of uneven business mood being carried forward from unpredictable business climate of 2016.

The report also stated that, “The business operating environment remained the major hurdle for businesses in Q1 2017. The largest negative contributions to the business condition came from cost of doing business index at -41.3 and access to credit index at -23.7. The financial environment continued to constrain the business climate. While drastic intervention by CBN in the FX market provided some liquidity and stability in the market, businesses (particularly manufacturing and non-manufacturing industries) continued to grapple with the issues of access to credit. Consequently, the level of investment declined with an index of -15.3. Similarly, businesses reported that their export order books were below normal levels, resulting in an export index of -4.7. Consequently, the effect was reflected in higher input cost of production.

However, the report posited that “Despite the challenging business environment, some leading indicators such as production, demand conditions and operating profit emerged positive in Q1 2017. Production index stands at +9.8, demand condition and operating profit indices stand at +3.2 and +8.2, respectively. While business activities improved in the services sector, manufacturing, trade, construction, oil and gas sectors reported decline in their activities.”

BCM Q1 2017 Key Findings

According to the report, responses from firms surveyed in Q1 2017 revealed that there was a strong indication that economic activities will continue to gather momentum over the next few quarters, with most of the key BCM leading indicators showing positive outlook. Overall, the BCM index stands at + 14.4.

The report stated that, “Although most business activities declined between January and March 2017 compared to 4th quarter 2016, this does not deter output expansion plan by managers and business executives in the next few months. Such decline crept in from inevitable consequence of domestic policy uncertainties that ravaged the economy in the preceding year. As reflected in the BCM uncertainty index, about 42 per cent of firms reported that the business activities remained unchanged compared to 4th quarter 2016.

“Despite cautious behaviour observed in the first quarter, optimism of businesses regarding the outlook outweighed their actual experience in the first quarter. The future expectation index stood at a balance of +34, suggesting that business and economic activities will witness some moderate bounce-back. With regard to the economic sectors, services and non-manufacturing are considerably more optimistic with positive indices of +28.4 and +24.1 in Q1-2017, respectively. The Manufacturing and Trade sectors exhibit cautious optimism about the outlook with indices of +14.7 and +12.4, respectively,” the report stated.

Continuing, the report further stated that, “Taken alongside the leading indicators, general business situation (+29), production (+20) and demand conditions (+17) will improve in subsequent quarters. The rising producer prices (+1.5), will likely contract investment in trade sector, but manufacturing, services and non-manufacturing industries will likely move into period of business expansion investment, with investment indices of +8.6, +26.7, and +5.2, respectively.

Future Expectations

In terms of future expectations, the BCM revealed a positive index of 34, which indicates positive sentiments and perception of business activities in the next two quarters: Q2 and Q3 2017.

On the future expectations, the report further averred that, “Indeed, expectations for output expansion, increased domestic sales, increased staffing levels and improved demand conditions appeared to drive this positive business outlook for this period. Sectors such as Manufacturing, Construction and Oil & Gas are expected to experience improved output in subsequent quarters. However, trade sector remains pessimistic about the future business activities with an index of -28.

Conclusion

Omisakin explained that, “All leading indicators point to positive sentiment and expectation across the board as managers were generally optimistic about business performance in the next two quarters.”

According to him, “This outlook is intuitively driven by improved efficiency in economic management (monetary, fiscal and trade). For instance, the recent launch of the Economic Recovery and Growth Plan (ERGP), which aims to deliver a Gross Domestic Product (GDP) growth of 2.2 per cent in 2017 coupled with reforms to ease the business environment, obviously influenced the perception of business and economic outlook in Nigeria.”

“Going forward, the NESG expects improvement in local production and increased patronage of Nigerian-made goods and services. Overall, by our forecast released in January 2017, we project positive GDP growth rate and general economic outlook in the year 2017,” he added.

About the Author

Samed Olukoya
Samed Olukoya is the CEO/Founder of investorsking.com, a digital business media, with over 10 years experience as a foreign exchange research analyst and trader.

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