News and Analysis
November 21, 2024
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In June, Kenya experienced a significant decline in business activity due to economic challenges, the negative impact of anti-tax protests, and policy uncertainty affecting sales.
The latest data from the Stanbic Kenya Purchasing Managers Index (PMI) reveals that new business intakes dropped at the fastest rate since November last year. This decline has resulted in decreased business confidence and weaker job creation, painting a concerning picture of the Kenyan private sector's health.
The survey, conducted between June 12th and 26th, captured responses primarily before the unrest on June 25th. The headline figure from the survey, the Purchasing Managers’ Index™ (PMI®), provides a snapshot of business conditions in Kenya. Readings above 50.0 signal improvement from the previous month, while readings below 50.0 indicate deterioration.
In June, the PMI fell to 47.2, dropping below the neutral 50.0 mark, the Survey Found. This signals a solid deterioration in the health of Kenya's private sector economy, marking the sharpest decline in seven months. This drop contrasts sharply with the PMI's 16-month high of 51.8 recorded in May, indicating a rapid shift in business conditions.
The survey detailed that after a period of solid expansion midway through the quarter, private sector output dropped significantly in June. This drop aligns with a steep fall in new business intakes.
According to the Survey, respondents cited tough economic conditions, driven by the cost-of-living crisis and protests related to the now-dropped Finance Bill 2023, as significant factors impacting sales volumes. Despite this overall downturn, the manufacturing sector stood out as the only sector to register growth in June, with new orders rising.
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The reduction in sales tempered efforts to expand capacity at Kenyan companies in June. Purchasing activity decreased for the first time in three months, leading to a reduction in firms' inventories of inputs. However, the pace of stock depletion was modest, suggesting that firms are cautiously managing their resources amid uncertain market conditions.
The Survey found employment numbers continued to rise, albeit at the weakest rate seen this year. Despite overall economic challenges, the slight increase in job creation indicates that some firms are still looking to build capacity.
However, the slow pace of job growth reflects broader concerns about the sustainability of economic recovery and business expansion.
Greater availability of raw materials and competition among vendors led to improved supplier performance in June. Delivery times shortened, although the reduction was the least marked since February.
This improvement in supplier performance might be attributed to businesses' reduced input demand, allowing suppliers to manage deliveries more efficiently.
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Input prices rose for the first time in three months in June, following a near-record decrease in the previous survey period. Respondents commonly noted higher taxation on products as driving up costs, offsetting reports of reduced fuel prices, and the positive impact of stronger exchange rates on import prices.
According to the Survey, the rate of input price inflation was modest, much softer than typically seen over the past four years. Cost increases were centred in the wholesale & retail, agriculture, and services sectors, contrasting with decreases in manufacturing and construction.
The annual headline inflation rate, as measured by the Consumer Price Index (CPI), was 4.6% in June 2024. According to the Kenya National Bureau of Statistics (KNBS), the price increase was mainly driven by the rise in prices of commodities under Transport (7.7%); Food and Non-Alcoholic Beverages (5.6%); and Housing, Water, Electricity, Gas and other fuels (3.1%) between June 2023 and June 2024.
The Stanbic Kenya Survey found that with cost pressures relatively mild, Kenyan firms posted only a slight rise in their output prices in June.
The survey found that business expectations towards future activity slipped to a four-month low. Economic challenges, coupled with ongoing policy uncertainty and the impact of protests, have made firms less optimistic about their sales and output forecasts for the year ahead.
Christopher Legilisho, Economist at Standard Bank, commented on the findings, highlighting several key concerns:
“In June, momentum in private sector activity declined, reflecting several concerns, top of the list being the proposed increase in taxes via the Finance Bill 2024, and the widespread protests in response, with unrest in Kenya restraining output and new business because customers delayed spending decisions in the face of such uncertainty.”
Legilisho noted that after two months of increased purchasing activity by firms, there was a dip in purchasing quantities and inventories due to reduced sales in several sectors, including construction, agriculture, wholesale, and retail. He also pointed out that:
“Input prices, purchase prices, and output prices recorded a mild increase in anticipation of the increased taxes proposed in the Finance Bill 2024. However, a stronger exchange rate and lower pump prices managed to restrain costs.”
Despite the recent upheaval, Legilisho remarked that job creation improved for a sixth consecutive month as firms increased capacity despite the dip in overall activity. However, he cautioned, "business optimism for the year ahead remains fragile.”
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Kenya’s economy grew by 5.0% in the first quarter of 2024, a slight decline from the 5.5% growth recorded in the same period last year, according to a report by the Kenya National Bureau of Statistics (KNBS) released on Wednesday.
The KNBS report indicates that most sectors, except for finance and insurance, recorded slower growth in the first quarter of 2024 compared to the same period in 2023.
The KNBS report also noted significant depreciation of the Kenyan Shilling against major currencies during the first quarter of 2024 compared to the same period in 2023. On average, the Kenyan Shilling weakened against the Pound Sterling, Euro, and US Dollar by 23.6%, 19.8%, and 18.4%, respectively.
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