To know the state of an economy, economists look at such macro-economic fundamentals as GDP growth rate, inflation rate, unemployment rate, the Forex market, and many other well-known and widely used indicators. However, there is an economic index less pronounced you might think it does not exist. This economic index is known as the Purchasing Managers’ Index or PMI. This article will focus on what the PMI is and how important it is in measuring the ‘health’ of an economy.
As with any index, credibility and void of bias is everything. To come up with this index, a survey is conducted on industries, where purchasing managers are required to respond to questionnaires. In the questionnaire are questions trying to get answers on what the output levels are for that particular business or industry. It also assesses whether there are plans to cut or increase employment levels, what the inventory levels are, and also what the business perspective in the near future is. A PMI score is measured on the 50 mark. A PMI score of less than 50 indicates a contraction in the economy; this means that there is a drop in the production levels, the unemployment levels have gone down, and that the industry is not growing. On the other hand, a score above 50 shows that there is growth in the industries; production levels are growing as well as employment levels.
However, it is important to note the industries under consideration and how much they contribute to the country’s GDP. For instance, in the UK, the focus is on the manufacturing and the service industry. As per Top Rated Forex brokers’ website, the service industry contributes much more to the GDP of the UK as compared to the Manufacturing industry. As such, when there is shrinkage in the service industry, the monetary policymakers tend to respond by adjusting and effecting Monetary Policy Rate that will necessitate growth. However, for instance, in a particular month when PMI for the manufacturing industry falls below 50 to 49 and the Service industry remains above 50, it is very highly unlikely that the UK monetary policymakers will react to this. This is due to the fact the industry that contributes more to GDP shows growth and as a consequence indicates overall growth in the economy.
In the Zambian economy, the Stanbic Bank Composite PMI, considers the agriculture, construction, service, and wholesale & retail industries. According to the publication on TRADING ECONOMICS website, the panel is stratified by GDP and company workforce size. The PMI is a vital indicator to the central bank of Zambia; it guides its policy rate direction. According to the bank of Zambia website, at its most recent monetary policy committee meeting for Q3 2020, the bank of Zambia adjusted downward the MPC rate by 125 basis points, moving it from 9.25% to 8%. This was in a bid to increase liquidity in the economy and also affect growth. When the policy rate is lowered, it is expected that commercial banks will also lower their lending rates hence reducing the cost of borrowing for investment purposes.
This was a commendable move on the part of BOZ considering that the Stanbic Bank Composite PMI had been posting a score below the 50 mark which indicates contractions in the economy. In the month leading to the last held MPC meeting, the PMI was at 44.6 and as per publication on TRADING ECONOMICS website, this signaled another marked decline in business conditions across the Zambian private sector. Employment decreased for the sixth month running at a sharper rate. Purchasing activities, as well, went down.
PMI is an important indicator even for Forex traders because it guides them on the likely measures the central bank is to take that might affect the exchange rate. Thus, traders watch the PMI closely and make adjustments in anticipation of the step the monetary policymakers will take. The month of August 2020, showed a fall in the Stanbic bank PMI to 43.4 from 44.6 in the month of July 2020. Therefore, it will be interesting to see what the next MPC rate will look like.