Factory new orders and output dropped in March - survey

The downturn was a contrast to February which saw an improvement in private sector activities.

In Summary

•Output returns to contraction, but employment rises.

•New orders fall only fractionally as input and output price inflation continue to ease.

Production at the East African Breweries Limited plant in Nairobi/FILE
PAYMENT: Production at the East African Breweries Limited plant in Nairobi/FILE

Kenya's private sector activities recorded a slight deterioration in operating conditions in March, the latest Standard Bank private sector index indicates, as order book volumes and output levels contracted.

The downturn was a contrast to February, which saw an improvement in the private sector for the first time in six months.

Despite the overall decline, the survey data provided some positive signals for Kenyan businesses.

Staffing and inventories showed further growth, indicating potential opportunities for expansion.

Additionally, input cost inflation slowed to its lowest level in over three years, amid a recovery in the shilling.

Savings were passed on to customers as output prices also rose at a slower pace.

The headline figure derived from the survey is the Purchasing Managers’ Index Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.

The headline PMI registered below the 50.0 neutral mark in March, falling to 49.7 from 51.3 in February.

The reading was the lowest recorded for three months and signalled a slight decline in operating conditions.

“Output, new orders and purchasing activity contracted due to fewer sales and less readily available cash flow.Firms noted that, despite lower inflation, a stronger shilling against the USD in March, and increased marketing efforts, cost-of living pressures are still subduing consumer demand," said Christopher Legilisho, Economist at Standard Bank.

Output contracted modestly, which survey panellists attributed to lower new order intakes and cash flow problems.

The decline in new orders signalled by the survey was only fractional, however, as firms reported an easing of price pressures that supported customer spending.

Price metrics pointed to a sustained slowdown in inflationary pressures at the end of the first quarter.

Overall input costs rose at the slowest pace since February 2021, as a stronger exchange rate in the Kenyan shilling against the US dollar helped reduce import costs.

Lower fuel prices were also cited, though some firms reported higher VAT payments.

The softer increase in input prices led to a weaker uptick in selling charges, the lowest since January 2022 and one that was below the long-run trend.

Kenyan firms meanwhile reduced their purchases of inputs in line with weaker sales.

The rate of decrease was the quickest recorded since last November. Reduced buying contributed to shorter supplier delivery times as pressure on vendors relaxed.

Concurrently, firms managed to build their inventories for the second month running, driven by hopes of improving customer demand.

For a similar reason, companies raised their employment numbers for the third month running during March.

“That said, positively, firms continued to hire and increase inventories because they foresee improved demand. Though off a low base, business expectations for 2024 recovered somewhat, led by wholesale and retail services firms; the index for future expectations had hit the weakest level on record in February," Legilisho  said.

Lower inflation trends boosted the demand outlook and supported expansion plans, with services and wholesale and retail firms being the most optimistic.

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