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Private sector activity shrinks for first time in 7 months on global shock, weak demand
An aerial view of downtown Nairobi CBD as pictured on December 5, 2023.Kenya’s private sector slipped into contraction in March as weak demand and rising costs slowed business activity.
Kenya’s private sector activity slipped into a contraction in March, ending a six-month expansion streak as weak consumer demand and rising costs weighed on businesses.
Latest data from the Stanbic Bank Kenya Purchasing Managers’ Index (PMI) shows the index dropped to 47.7 in March from 50.4 in February, falling below the 50-point threshold that separates growth from contraction.
The reading signals a deterioration in operating conditions for the first time since August last year, when the reading stood at 49.4 percent, marking a continued slowdown in momentum after four consecutive monthly declines in the index.
Businesses reported a broad-based decline in output and new orders, reflecting tightening household budgets and reduced cash circulation across the economy.
The slowdown was largely demand-driven, with firms indicating that customers were scaling back spending amid financial constraints, leading to lower sales volumes and reduced activity across most sectors.
Survey data shows total order books declined for the first time in seven months, prompting companies to cut back production in response to weaker demand conditions.
The downturn comes against a backdrop of external pressures, including geopolitical tensions in the Middle East, which firms say have disrupted supply chains and increased operating costs.
“A weaker Stanbic Kenya PMI in March reflects demand-side concerns – softer spending power constraining demand – and supply-side concerns about the war in the Middle East,” Christopher Legilisho, an economist at Standard Bank, said in the PMI report.
“Output and new orders declined in most sectors, implying that businesses expect to be constrained by the disruptions from geopolitical tensions.”
Businesses cited higher fuel and transport costs linked to the conflict, alongside logistical challenges affecting delivery timelines and export markets.
Cost pressures intensified during the month, with input prices rising at the fastest pace in just over two years, driven by higher taxes, shipping costs, and fuel prices.
Despite the sharp increase in costs, firms were largely unable to pass these expenses on to consumers due to subdued demand and heightened competition, resulting in only modest sale price increases.
This pricing constraint highlights the fragile state of demand in the economy, with businesses forced to absorb rising costs to remain competitive in a price-sensitive market.
Employment growth also softened during the period, with firms reporting only a marginal increase in staffing levels, the weakest expansion since October last year.
Hiring was mainly supported by the agricultural sector, while companies in the construction and services sectors slowed or halted recruitment in response to declining workloads.
Backlogs of work fell sharply, marking the most pronounced decline in nearly six years as reduced sales eased pressure on capacity and allowed firms to clear outstanding orders.
Despite the current slowdown, business sentiment remained relatively resilient, with about one-fifth of surveyed firms expecting output to grow over the next 12 months.
“Confidence levels were little-changed from February, with around 21 percent of monitored firms providing positive forecasts for output over the coming 12 months in March,” reported Stanbic.
“Expectations were largely underlined by business statements about their plans to expand, invest, and diversify their products. Manufacturers were the most upbeat about future activity, with service providers the least.”
