Stanbic’s indicator of business conditions as experienced in 40 countries

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VICTOR CHILESHE

VICTOR CHILESHE writes

PMI is a household name in Zambia today; I don’t mean to brag, but largely thanks to Stanbic Bank Zambia for introducing it some five years ago.

Perhaps you, like most people, wonder what PMI means or is all about; more so, how it links to Zambia’s economy. Read on, and I hope to answer these and other pertinent questions around PMI. The best place to start, of course, is the beginning – definition and a brief history; then move forward to the heart of the matter – how PMI links to the Zambian economy.

What is PMI?

PMI is an acronym for Purchasing Managers’ Index. It was named after purchasing managers who are believed to on top of operations within an organisation. These managers, for example, hired – and still hire – various services for a company. Thus, PMI is a legendary name.

PMI is a survey-based indicator of business conditions, which includes individual measures (so-called ‘sub-indices’) of business output, new orders, employment, costs, selling prices, exports, purchasing activity, supplier performance, backlogs of orders and inventories of both inputs and finished goods, where applicable.

The surveys ask 400 respondents from over 40 countries to report the change in each variable compared to the prior month, noting whether each has risen or improved; fallen or deteriorated; or remained unchanged. These objective questions are accompanied by one subjective ‘sentiment’ question, asking companies whether they forecast their output to be higher, the same or lower in a year’s time.

PMI data are compiled by IHS Markit, a London–based global information provider. The monthly data are derived from surveys of senior executives at private sector companies and are available only via subscription.

The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment, and inventories.

PMI has been a leading global economic indicator for decades. Nonetheless, the Stanbic Zambia PMI was launched in 2015, a year after IHS Markit was formed in London. Thus, it is safe to say that our PMI is half a decade this year. Let’s now move forward to the PMI reading.

PMI Reading

The PMI Headline reading ranges from zero to 100%. A zero reading means things have gone to the dogs; the private sector is in shambles; and generally, business conditions in a country are unfavorable. To put it in more economic jargon, a zero PMI Headline reading denotes economic collapse, meltdown, or economic crisis.

A 50 PMI Headline reading indicates stability. This means things are just the same; neither good nor bad. Therefore, if the PMI reading for Zambia was – hypothetically speaking – 50 in June, busines condition would be described as having stabilised during the month.

This, however, does not call for celebration because the next PMI Headline reading could either go down or up. The point is; having a 50 PMI Headline in one or several months, does not mean the economy is doing better, but fair; neither does it mean the country must be reluctant, but work hard to either maintain average performance or soar above.

A PMI Headline reading above 50 represents an expansion when compared with the previous month. It means business conditions in the current month are better than in the previous one. For example, if the PMI for May was 40 and 53 in June, the reading implies that business conditions in the private sector, and indeed, the entire economy, have improved (i.e. expanded) by 13 percentage points. Simply put, the economy has expanded to 53 in June from 40 posted in May.

On the contrary, a PMI Headline reading under 50 represents a contraction. This means business conditions in the current month have deteriorated than in the previous one. It is usually highlighted in red to signify danger or a looming recession. Let’s switch things in our example given above. So, if the PMI for May was 53 and 40 in June, the reading implies that business conditions in the private sector, and indeed, the entire economy, have deteriorated (i.e. contracted) by 13 percentage points. Simply put, the economy has contracted to 40 in June from 53 posted in May and sends fears of a possible recession.

How PMI links to the Zambian Economy

PMI speaks to the pulse of business in Zambia. It informs us whether there is life in the country’s private sector; and ultimately, the health of the country’s economy. It is important to stress that the private sector in Zambia drives the economy.

Imagine what would happen to a bus when the driver is suddenly shot dead or suffers a stroke while on a long journey. The bus would possibly veer off the road and overturn in the former or stop abruptly in the latter. Either way, the long journey would be disrupted. In this analogy, the driver is the private sector in Zambia and the bus is the economy. PMI then gives intel on whether the driver has been shot dead or suffering a stroke. In addition, it informs us whether the driver is in good health.

Therefore, we help government prepare for the best, and indeed, the worst. We help businesses strategise and re-strategise according to conditions in the environment. The beauty with our PMI is that it is factual, timely, comparable and needs no revision. Timely in the sense that we release it on the 5th day of every month. So, businesses have access to an economic thermometer, well in advance, before most indictors, which are usually quarterly.

Our PMI is factual in the sense that its data is compiled from survey questions tracking actual changes in business volumes such as output, not sentiment-based questions. In other words, ours is not hearsay, but, as millennials would say, the reality of things. So, you are guaranteed to take a glimpse of the true picture of Zambia’s economy through our PMI.

Our PMI is not only factual, but comparable too. Using a proven standardised methodology, PMI data are compiled for over 40 countries. This means Zambia has over 40 other countries to compare itself with each month. Comparability helps the country gauge itself against how good or how bad other countries are performing on the index.

Lastly, our PMI needs no revisions; it’s once and for all. Unlike many official economic indicators, PMI data are not revised after publication. Once we publish, we move forward to the next release. That is how serious our PMI is!

The bottom line is PMI shows the health of Zambia’s economy; it shows whether the economy is expanding or contracting. Therefore, never miss any Stanbic Bank Zambia PMI release because you might just miss an important monthly health check for the country’s economy.

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