- High inflation due to rising fuel and food costs hurt business confidence in April.
- Stanbic Bank’s Purchasing Manager Index (PMI) shows output and new orders declined sharply.
- Downturn was led by manufacturing and services, contrasting with expansions in agriculture, construction, wholesale and retail.
Kenya’s business confidence dipped to the lowest levels on record in April, the latest PMI survey shows. During the period, high inflation and political unrest led to a sharp fall in customer demand ruffling business confidence.
Activity levels and input purchases also fell sharply, but employment numbers continued to rise, the Purchasing Managers’ Index indicates. On a positive note, input cost pressures showed further signs of having peaked, dropping to their lowest recorded in 2023 so far, though remaining steep.
The headline figure derived from the survey by Stanbic Bank Kenya is the PMI. Readings above 50 signal an improvement in business conditions on the previous month, while readings below 50 show a deterioration. The headline PMI registered below the 50.0 mark for the third month in a row in April.
Decline in health of private sector
Dropping to 47.2 from 49.2 in March, the index also signalled a solid and faster decline in the health of the private sector economy at the start of the second quarter.
According to the survey, the cost-of-living crisis continued to hinder business performance. Additionally, persistent wave of political unrest led to a marked drop in client demand.
New business inflows fell sharply and at a quicker pace than in March despite a sustained upturn in export sales. Similarly, business activity declined for the third consecutive month but at a much sharper pace than in the previous survey period.
Sector data indicated that the downturn was led by manufacturing and services, contrasting with expansions in the agriculture, construction and wholesale and retail.
Concerns over the impact of high inflation led to a marked drop in firms’ output expectations for the next 12 months, which declined to their lowest level since the survey began in January 2014.
Weakening shilling against major currencies
Kenya’s inflation was recorded at 7.9 percent in April which is above the government’s highest target of 7.5 percent. The high cost of living is mainly driven by high food prices and other commodities, with fuel costs and cost of production by local firms also playing out.
The weak shilling against major global trading currencies has also led to a sharp rise on the cost of imports.
Read also: How the Kenyan Shilling will perform against the US Dollar in 2023
While sentiment remained positive, only eight percent of respondents predicted activity to rise over the forthcoming year. Purchasing levels declined solidly in April, following a slight increase in March.
Despite this, a sharp cut in activity allowed output and new orders fall sharply. Price pressures eased but remain marked with year-ahead outlook falling to weakest in the survey’s history.
“In April, Kenya’s private sector output broadly deteriorated across several sectors covered by the PMI survey as the country experienced another contraction that began in February and continued through to April,” says Mulalo Madula, Economist at Standard Bank.
Political protests
Despite continued growth in export sales, deteriorating domestic market conditions due in large part to higher costs and political protests dampened business activity and domestic demand as cost pressures continued to rise, Madula added.
A further increase in the amount of outstanding work in April led to a slightly positive employment trend, but in the absence of sales growth, the wave of new jobs is unlikely to be sustained.
Read also: Kenya’s economy slowed down in 2022 but created more jobs
“The outlook for output for the upcoming 12 months significantly decreased, reaching the lowest level since the survey’s inception,” notes Madula. This was largely due to worries about the effects of high inflation as power tariffs were increased by around 19 percent in April.
But then again, overall year-on-year inflation is likely to slow, having fallen to 7.9 percent in April from 9.2 percent in March as statistical base effects continue to unwind, although underlying costs for firms are likely to remain elevated.
The survey’s data were collected between April 12-26 April 2023 by S&P Global and Stanbic Bank Kenya.
Limited cash flow
Firms are expected to store higher volumes of inputs, but there are concerns that supplies could run short due to limited cash flow. In contrast to purchasing, Kenyan companies added to their workforces in April.
Employment numbers rose at the quickest pace in 2023 so far, albeit only slightly. The upturn came amid a further increase in outstanding work, the third in the past four months. On the price front, there were signs that cost pressures were moderating at the start of the second quarter.
Input prices rose at the slowest rate in four months, helped by softening demand. Reports of an improvement in the availability of local goods supported a slight reduction in average lead times.
That said, the pace of cost inflation remained steep overall, as firms again highlighted rising import prices due to a depreciation in the Kenyan shilling against the US dollar. Rising costs continued to be passed on to customers in April, indicated by another steep increase in output charges.
Like input prices, the rate of inflation slowed from March but remained faster than the long-run trend.
