Stanbic Bank Kenya PMI - Output growth softens again in July, as inflationary pressures strengthen

Key Findings

• Output and new order growth weaken to three month lows
• Tax changes push input costs higher
• Business optimism improves to five-month high

Growth momentum in Kenya's private sector slowed again at the start of the third quarter of the year, as surveyed businesses reported weaker expansions in output, new orders, employment and purchasing. At the same time, cost inflationary pressures rose to a 16-month high as tax changes resulted in a sharp uptick in purchase prices.

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

The headline index fell for a second straight month from 51.0 in June to 50.6 in July, to indicate only a marginal improvement in operating conditions across Kenya's private sector. Barring the sharp downturn in April, the rate of growth was the joint-weakest since conditions began to improve after the first wave of the pandemic.

The three biggest components of the PMI, the Output, New Orders and Employment indices, all fell to threemonth lows, but remained above the 50.0 no-change mark to indicate further expansions.

Businesses that saw an increase in new order volumes often pointed to an improvement in cash flow and increased marketing activity. On the other hand, some firms reported losing customers due to the ongoing effect of the pandemic.

Underlying sector data also presented a mixed picture in July. Agriculture, construction and services firms registered growth of new business, whereas manufacturing and wholesale & retail companies saw a decline. Output trends also followed the same pattern, leading to only a modest expansion overall.

With sales growth slowing, the rate of job creation among Kenyan firms eased to the softest in three months. Firms also largely held off from making new purchases, as input buying rose only slightly and to a far lesser extent compared to June.

Cost pressures accelerated sharply at the start of the third quarter, as businesses found that tax changes led to a marked increase in the price of imported goods. Higher fuel costs and input shortages were also mentioned, with the resulting increase in input prices the quickest since March 2020. Amid efforts to maintain profit margins, output charges were also raised to a greater extent, albeit not as quickly as input costs.

On a positive note, business confidence improved to a five-month high in July, with nearly a third of businesses providing a positive forecast for output over the coming 12 months. Several firms cited plans to open new branches and increase their advertising. That said, the overall degree of optimism remained some way off the survey's long-run average (data collection began in January 2014).

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