High living cost hurt private sector September growth

The outlook for future activity remained relatively weak

In Summary
  • PMI dropped to 50.4 from 51.1 points in August
  • On a positive note, Backlogs of work meanwhile rose for the fourth month running
Production at the East African Breweries Limited plant in Nairobi/FILE
Production at the East African Breweries Limited plant in Nairobi/FILE

Private sector activity in Kenya grew at a marginal pace in September as rising living costs reduced consumer spending and new orders.

Data from Stanbic Bank shows the Purchasing Managers' Index (PMI) for September fell to a five-month low of 50.4 points from 51.1 in August.

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

According to the report, the hike in energy prices particularly hit demand and also sharply drove the cost of input and output charge inflation.

Stanbic Bank's Fixed Income and Currency Strategist Kuria Kamau said while business conditions continued to improve in September, this was the slowest pace in the past five months due to rising inflation. 

"Despite improvements in the levels of employment and purchases, the future outlook for output continues to be relatively low on account of uncertainty around inflation and Covid-19,'' Kuria said.

More positively, capacity pressures led firms to increase their staffing levels at the strongest rate since January.

Output and new orders rose in September, driven by a continued recovery in demand from the strict lockdown earlier in the year.

Unsubstantiated reports indicate that some clients had cash to spend whereas others struggled with higher prices and increased living costs. New orders rose in four of the five monitored sectors during the month,

Exports were also a key source of growth, as foreign orders increased at the fastest rate since October 2020.

Even so, there were numerous reports that a rise in living costs had weakened consumer spending, leading to a softer - and only marginal - rate of total sales growth.

Subsequently, the rate at which business activity expanded was the slowest seen since the return to growth following April’s lockdown-induced decline.

Higher fuel prices was a key factor leading to the uptick in living costs. As well as impacting demand, businesses found that the price hike added to purchasing prices, which rose sharply.

During the month under review, the Energy and Petroleum Regulatory Authority (EPRA) reviewed upwards fuel prices , adding Sh7.58 to a litre of super petrol, Sh7.94 for a litre of diesel, and Sh12.97 for kerosene.

This has seen a litre of Super Petrol, diesel, and kerosene  now retailing at Sh134.72, Sh115.60, and Sh110.82 per litre respectively in Nairobi.

The sharp rise in the cost of fuel affected other basic household needs pushed the cost of living in September to 18-months high.

Monthly Kenya National Bureau of Statistics (KNBS) data shows inflation rose to 6.91 per cent compared to 6.57 per cent in August.

Kenya last recorded such high monthly inflation in February last year when it hit 7.17 per cent.

Faced with higher cost burdens, firms raised their selling charges to the greatest extent since February.

Backlogs of work meanwhile rose for the fourth month running, leading a number of companies to add to their staffing levels.

Construction was the only monitored category to see a noticeable rise in work-in-hand, while manufacturing and services registered declines.

Notably, the rate of employment growth was the quickest seen for eight months.

The rate of employment growth quickened to the fastest since the start of the year. All five sectors added to their workforces during the month, with particularly sharp increases seen in construction and agriculture.

Input purchasing also expanded, and to the strongest degree since June, while firms saw delivery times shorten to the greatest extent in almost a year.

These improvements supported another modest increase in inventory levels.

The outlook for future activity remained relatively weak in September, despite improving slightly from August.

Around 72 per cent of respondents expect output to be unchanged over the coming year, amid uncertainty surrounding the pandemic and inflationary pressures.

Positive forecasts were meanwhile driven by hopes of increased marketing and capital investment.