The Stanbic Bank Kenya Purchasing Managers’ Index (PMI) has returned to contraction territory, painting a concerning picture for the country’s private sector economy. In September 2023, the index dropped from 50.6 to 47.8, indicating a moderate deterioration in business conditions. This decline follows a brief respite in August when the PMI signaled an upturn in operating conditions for the first time in seven months.
Factors Behind the Contraction
- Decline in Output and New Orders: Output and new order volumes both declined for the seventh time in eight months in September. Rapid price increases have been the primary culprit behind these contractions. These price increases have led to intense cost pressures and a decrease in customer demand.
- Impact of Inflation: Elevated inflationary pressures and rising fuel bills have played a significant role in dampening client sales. These factors have also contributed to the second-fastest rise in input costs in the PMI survey’s near-decade history.
- Reduction in Employment and Inventories: In response to the challenging economic conditions, businesses made cuts to both employment and inventories for the first time in seven months. This suggests that companies are bracing for tougher times ahead.
- Rise in Selling Charges: In an attempt to pass on their increased costs to customers, firms raised selling charges sharply. This could put additional pressure on consumers who are already grappling with rising living costs.
Christopher Legilisho, an Economist at Standard Bank, highlighted the factors contributing to the decline in economic momentum:
- Fuel Price Increases: The Energy and Petroleum Regulatory Authority (EPRA) raised pump prices, impacting transportation costs and overall consumer prices.
- Taxation Pressures: Increased taxation and the prospect of further tax hikes have also added to the cost of living for Kenyan citizens.
- Rising Interest Rates: Higher interest rates have negatively impacted consumer demand and business expectations.
Despite the reduced output, manufacturing firms seem to be the most optimistic about the future, while wholesale and retail firms are the least optimistic. Inflationary pressures continue to persist, with both input and output prices remaining elevated.
While the September PMI presents a grim picture, some optimism remains. Firms still hold positive expectations for future activity, with 19% of survey respondents forecasting output growth over the coming year, mainly due to expansion plans. However, the overall optimism remains weak in a historical context.