Kenyan businesses slipped back into
contraction in August as supply shortages, rising costs and liquidity
constraints forced companies to cut output and scale back purchases, even as
customer sales continued to rise.
The latest Stanbic Bank Kenya
Purchasing Managers’ Index (PMI) fell to 49.7 in August from 51.3 in July,
signalling a marginal deterioration in private sector operating conditions and
ending a brief recovery that had seen the index rise above the 50-point growth
threshold for the first time in five months.
A reading above 50 signals an
improvement in business conditions from the previous month, while one below
that level points to a deterioration.
The August decline was driven
largely by reduced output and falling stocks of purchases, highlighting the
pressure facing companies as they struggle to convert improving demand into
increased production.
Business activity declined for the
sixth consecutive month, with the pace of contraction accelerating to a solid
level in August.
This came despite private sector
firms reporting increased new orders for the third month running, although the
growth in sales was weaker than that recorded in July.
Companies attributed the rise in
sales to bulk buying by customers, increased advertising and stronger demand
for private healthcare services amid public sector strikes.
However, the improvement in demand
has yet to translate into higher production, with firms citing the high cost of
inputs, limited liquidity and shortages of key materials as major constraints.
The survey showed that companies
were increasingly unable or unwilling to purchase sufficient inputs to meet
demand, leading to a further decline in production and purchasing activity.
Input buying fell for the fourth
consecutive month in August, with the rate of decline accelerating to its
fastest pace in just over a year.
Stocks of purchases also declined,
recording their sharpest fall in three-and-a-half years, although the overall
contraction remained modest.
The slowdown in purchasing, however,
helped ease pressure on supply chains. Kenyan firms reported shorter supplier
delivery times for the first time in three months, although shortages of some
materials continued to limit the improvement.
The mismatch between rising orders
and falling output also resulted in a continued accumulation of unfinished
work.
Backlogs increased at one of the
strongest rates seen in more than five-and-a-half years, despite the pace of
accumulation easing from June.
Businesses responded to the growing
capacity pressures by increasing employment for the third consecutive month.
Workforce numbers expanded at an
above-average pace as companies sought to strengthen their ability to handle
growing workloads and position themselves for an anticipated improvement in
business activity.
The employment gains and rising
order books were also reflected in a sharp improvement in business confidence.
Firms expressed their strongest
optimism about future output since February 2023, with companies pointing to
planned investment in marketing, expanded production capacity, product
diversification and new technology as key drivers of expected growth over the
next 12 months.
Cost pressures also showed some
signs of easing, offering businesses a potential boost heading into the final
months of the year.
Although input price inflation
remained marked, the pace of cost increases slowed to its lowest level since
April.
Higher fuel and transport costs
continued to weigh on businesses, while wage costs rose at a historically sharp
pace.
Companies continued to pass part of
the increased costs on to customers in an effort to protect profit margins,
although the pace of price increases eased to a four-month low.
“Inflationary pressures remain elevated.
Still, the moderation in input and output
price inflation from June peaks may imply
gradual disinflation. However, rising wage
costs are broadening price pressures
beyond raw materials,” said Christopher Legilisho,
Economist at Stanbic Bank.
“Therefore, underlying
inflation may prove sticky as firms pass
these increases on to consumers. This may
well play out, particularly if demand remains
robust. Further, sustained cost pressures
may continue to weigh on margins as well as
delay a stronger output recovery.”
The August PMI data therefore paints
a mixed picture for Kenya’s private sector, with improving sales, rising
employment and stronger business confidence being offset by production
constraints, weak purchasing activity and persistent cost pressures.
The key challenge for businesses
will be whether easing input inflation and improving supply conditions can
allow firms to rebuild inventories and increase output fast enough to meet
recovering customer demand.