A DECLINE

Private sector performance drops to a nine-month low in March

The latest reading pointed to just a marginal improvement in the health of the private sector

In Summary
  • The PMI  dropped to 50.6 in March, down from 50.9 in February.
  • The two largest components of the PMI, the Output and New Orders indices signaled a slowing in both activity and demand growth in March.
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Kenya’s private sector performance dropped to the lowest levels last witnessed in June last year on a slowdown in the new orders as cash flow issues limited customer spending. 

According to the monthly Purchasing Managers’ Index (PMI) by Stanbic Bank, the sector dropped to 50.6 in March, down from 50.9 in February. This was the second consecutive monthly drop. 

Kuria Kamau, fixed income and currency strategist at Stanbic Bank said the demand growth was negatively affected by a resurgence in Covid-19 which resulted in households conserving cash and prioritizing spending to essential items.

''Output prices continued to rise, driven by higher input prices, and employment levels increased to clear backlogs of work. Firms’ outlook for output worsened on account of the resurgence in COVID-19 which is expected to affect demand,'' Kamau said. 

Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.

The latest reading pointed to just a marginal improvement in the health of the private sector, and the weakest seen since the recovery in economic conditions from the initial impact of the coronavirus disease 2019 (Covid-19) pandemic began last July.

The two largest components of the PMI, the Output and New Orders indices signaled a slowing in both activity and demand growth in March.

''Businesses highlighted that cash flow problem linked to the Covid-19 pandemic meant that households often limited spending to essential items,'' the report read in part. 

As a result, sales grew at the slowest rate since last November, with firms also seeing a loss of momentum from export orders. Subsequently, output increased at the slowest rate for nine months.

Private sector employment improved further during March, although here the rate of growth was only moderate.

Rising workforce numbers helped to reduce backlogs of work, which fell for the first time since November last year. Meanwhile, inventories rose at the slowest rate in the current growth sequence.

Rising fuel prices meanwhile led to another sharp uptick in purchase prices, driving further pressure on firms' margins.

An increase in local fuel prices often led suppliers to raise their charges. Output prices subsequently rose for the third straight month, but at a slower rate than input prices.

Input purchases rose at a slower rate in March, despite efforts from some companies to build stocks in anticipation of future sales growth. Input cost inflation was driven higher by a steep uptick in purchase prices at the end of the first quarter.

Competition among vendors led to a solid reduction in delivery times, the most marked for five months.

Expectations for future activity slipped in March and were the third-lowest seen in the series history.

Notably, only around a quarter of survey respondents expect an increase in output over the coming year, linked to new branch openings and hopes of rising customer orders.

Most remaining firms, meanwhile, predict no change in output amid worries of a further impact from Covid-19 on demand.

The PMI is a weighted average of the following five indices: New Orders (30 per cent), Output (25 per cent), Employment (20 per cent), Suppliers’ Delivery Times (15 per cent) and Stocks of Purchases (10 per cent).

For the PMI calculation, the Suppliers’ Delivery Times Index is inverted so that it moves in a comparable direction to the other indices.