- Tax changes led to a marked increase in the price of imported goods.
- Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.
Image: FILE
Growth momentum in Kenya's private sector slowed again at the start of the third quarter of the year, with businesses reporting weaker expansions in output, new orders, employment, and purchasing.
At the same time, cost inflationary pressures rose to a 16-month high as tax changes resulted in a sharp uptick in purchase prices.
The headline figure derived from the survey is the Purchasing Managers’ Index (PMI) fell for a second straight month from 51.0 in June to 50.6 in July, to indicate only a marginal improvement in operating conditions across Kenya's private sector.
Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.
Commenting on the index, Kuria Kamau, fixed income and currency strategist at Stanbic Bank said economic activities increased marginally in July from the previous month.
''Domestic demand improved by the second slowest pace since the lifting of public health restrictions after the first wave of the pandemic, with some firms reporting a drop in customer numbers,'' Kamau said.
He added that firms in agriculture, construction and services witnessed an increase in demand and output while those in manufacturing and trade saw declines.
"To meet this marginal increase in demand, firms also increased their output slightly as evidenced by slight increases in staffing levels and the number of purchases,'' Kamau said.
Both input and output price inflation accelerated due to an increase in import taxes, fuel costs and shortages in some raw materials. The 12-month outlook by firms rose to its highest level in 5 months but remains below its long-term average.
Barring the sharp downturn in April, the rate of growth was the joint-weakest since conditions began to improve after the first wave of the pandemic.
The three biggest components of the PMI, the Output, New Orders and Employment indices, all fell to three-month lows but remained above the 50.0 no-change marks to indicate further expansions.
Businesses that saw an increase in new order volumes often pointed to an improvement in cash flow and increased marketing activity.
On the other hand, some firms reported losing customers due to the ongoing effect of the pandemic.
Underlying sector data also presented a mixed picture in July.
Agriculture, construction and services firms registered a growth of the new business, whereas manufacturing and wholesale & retail companies saw a decline.
Output trends also followed the same pattern, leading to only a modest expansion overall.
With sales growth slowing, the rate of job creation among Kenyan firms eased to the softest in three months.
Firms also largely held off from making new purchases, as input buying rose only slightly and to a far lesser extent compared to June.
Cost pressures accelerated sharply at the start of the third quarter, as businesses found that tax changes led to a marked increase in the price of imported goods.
Higher fuel costs and input shortages were also mentioned, with the resulting increase in input prices the quickest since March 2020.
Amid efforts to maintain profit margins, output charges were also raised to a greater extent, albeit not as quickly as input costs.
On a positive note, business confidence improved to a five-month high in July, with nearly a third of businesses providing a positive forecast for output over the coming 12 months.
Several firms cited plans to open new branches and increase their advertising.
That said, the overall degree of optimism remained some way off the survey's long-run average.
Similar sentiments were registered in the CBK's Private Sector Market Perceptions Survey where CEOs revealed general optimism about economic growth prospects for 2021.
Respondents attributed this optimism to the continuing vaccinations and easing of Covid-19 containment measures.
Additionally, respondents were optimistic about the expected implementation of measures in the FY2021/22 Budget, including the economic stimulus programme and the continued investment in infrastructure.
However, respondents were concerned about continued uncertainties over the pandemic, increased taxes and heightened political activity.