DECLINE

Low business confidence as managers' index drops

The overall decline was modest and partly offset by a solid expansion in export sales.

In Summary
  • Output levels decreased at a sharp pace across the Kenyan private sector in May, with the rate of contraction accelerating to a 13-month high.
  • Selling prices rose sharply as a result, leading to a further decrease in new orders
Athi River Mining plant.
Athi River Mining plant.
Image: FILE

Kenya's business conditions deteriorated for the second month running in May, with inflationary pressures subduing customer demand leading to a reduction in output.

The latest Purchasing Managers Index (PMI) by Stanbic Bank shows that rising fuel prices, input shortages, and exchange rate weakness culminated in a marked uplift in input prices, with inflation remaining at April's over eight-year high.

The PMI posted below the 50.0 mark for the second consecutive month in May, falling to 48.2 from 49.5 in April.

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

Though modest, the decline in business conditions reflects sustained falls in both output and new orders, as well as a renewed drop in employment.

Output levels decreased at a sharp pace across the Kenyan private sector in May, with the rate of contraction accelerating to a 13-month high.

New business dropped for the second month running in May, as firms saw clients rein in spending due to the higher cost of living.

That said, the overall decline was modest and partly offset by a solid expansion in export sales.

Selling prices rose sharply as a result, leading to a further decrease in new orders and bringing output forecasts down to a record low for the third month running.

According to panelists, the reduction in activity was overwhelmingly due to inflationary pressures, which impacted both operating costs and customer demand.

Meanwhile, the rate of input cost inflation was unchanged from April's near-record high.

Companies often reported rises in the cost of fuel and a range of items in short supply due to the war in Ukraine, while a strengthening US dollar added to import costs.

This translated into a further uptick in output charges which, despite softening to a three-month low, was still historically sharp.

More positively, lower sales allowed a degree of spare capacity midway through the second quarter, leading to the first decline in outstanding work since January.

With workloads falling, businesses also reported a slight fall in employment. Purchasing activity was broadly unchanged in May, ending a three-month run of growth.

Nevertheless, there was further evidence of firms stockpiling inputs to avoid shortages and price hikes. This was helped by a modest improvement in suppliers' delivery times.

Kuria Kamau, Fixed Income and Currency Strategist at Stanbic Bank said economic activity in Kenya contracted for the second consecutive month in May due to inflationary pressures that resulted in a drop in customer demand and a reduction in firms' output. 

"The higher input prices coupled with lower output by firms resulted in a further increase in output prices. The increase in output prices, in turn, led to a reduction in domestic demand as clients cut back on spending due to the rising cost of living,'' Kamau said.

Business confidence dropped to a record low for the third straight month in May, amid increased uncertainty over supply chains, inflation, geopolitical tensions, and the resulting impact on sales in domestic markets.