Stability in private sector business conditions improved in December buoyed by a considerable cooling of inflationary pressures.
According to the latest Purchasing Managers’ Index (PMI) released Thursday by Stanbic Bank, rises in input costs and output prices were the softest since April, having slowed markedly from record highs in October.
Subsequently, many companies saw a recovery in new work amid improved client spending, offsetting the impact of cost-of-living pressures.
As such, new orders, output and employment all declined to lesser degrees.
The headline PMI moved three points higher in December, up to 48.8 from 45.8 in November, to signal a modest and softer decline in operating conditions across Kenya.
Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show deterioration.
Christopher Legilisho, Economist at Standard Bank notes that the PMI improved in December, despite still difficult business conditions for the private sector.
"Service sector companies reported an uplift in activity while declines persisted particularly in manufacturing and construction sectors, as firms continued to signal cost-of-living pressures and weak demand conditions,'' says Legilisho.
He adds that inflationary pressures are noted to have eased, amid better cash flow prospects for clients.
"The rate of job declines also softened compared to previous months with the agricultural sector seeing an increase in hiring."
According to anecdotal evidence, customer turnout and purchasing power improved amid a softening in inflationary pressures, especially across the services sector.
Firms were also supported by the sharpest increase in new export business in exactly two years.
On the flip side, contractions in output and new orders remained sharp in the manufacturing and construction sectors, as firms continued to signal cost-of-living pressures and weak demand conditions.
December survey data also highlighted a marked slowdown in input cost inflation across the private sector.
After reaching a survey-record peak in October, the rate of inflation slowed for the second month running and by the greatest degree ever noted.
According to the Kenya National Bureau of Statistics (KNBS) El Nino rains helped slow down the increase in consumer prices to a 20-month low as prices of vegetables and livestock products dropped.
Inflation—a measure of the increase in consumer prices over 12 months—has dropped to the levels last seen in April 2022 when it was at 6.47 percent.
This means that inflation has for six months remained anchored within the Central Bank of Kenya’s target of between 2.5 percent and 7.5 percent.
While firms indicated that currency weakness and tax Input prices and output charges rise at much softer rates, new orders decrease only slightly.
The local currency has been in a depreciation mode, dropping over 30 units in a year against the US dollar.
The shilling has adjusted downwards 23.39, 25.93 and 27.27 percent to the dollar, euro and pound respectively. It has however adjusted upwards 14.27 percent to the SA rand.
Furthermore, Kenyan businesses reported elevated inventories, with a slowdown in price increases in December.
There was a notable reprieve from fuel and transport costs that moderated during the month.
Fuel prices dropped by the biggest margin in over two years of up to Sh5 per litre in the latest review as consumers started enjoying relief from a drop in global prices of crude.
A litre of super petrol now retails at Sh212.36 in Nairobi from Sh217 while that of diesel is going for Sh201.47 from Sh203.47.
The last time pump prices dropped by an equivalent margin was in October 2021 when a litre of super petrol dropped from Sh134.72 to Sh129.72 for a litre of super petrol while that of diesel dropped from Sh115.6 to Sh110.60.
Still, business expectations for the year ahead remain quite weak based on the survey results from respondents.
Similarly, average output charges rose to a much softer degree in December, albeit remaining sharp and faster than the long-run average.
Sector data showed a cooling of inflationary pressures in all segments except agriculture, with manufacturers even reducing factory gate prices.
With cost pressures easing and the downturn in sales softening, purchasing activity at Kenyan firms was broadly stable in December, helping businesses to raise their inventories and deplete backlogs of work.
Lead times on purchased items were shortened for the third month running.
The drop in employment levels was also tempered at the end of the year, with the latest data indicating the softest fall since September. Agriculture was the only sector to see a rise in staffing.
Nonetheless, Kenyan businesses were less optimistic about future activity in December, with the degree of confidence slipping to a seven-month low.
Expectations were also among the lowest seen on record, with just 11 per cent of panellists predicting growth over 2024.