Kenyan Private Sector Sees Sharpest Growth in 20 Months, Stanbic Bank PMI Report

In May, the Stanbic Bank Kenya Purchasing Managers’ Index™ (PMI) indicated a significant improvement in private sector business conditions. Falling cost burdens and rising new business contributed to this positive trend, with activity levels expanding at the sharpest rate recorded in 20 months. Input buying growth also saw a notable increase, while job creation continued slowly.

Reductions in fuel prices and import costs led to a further drop in overall input prices, following the first decrease in nearly four years in April. Although selling prices started to rise again, the increase was gradual.

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The headline figure derived from the survey is the PMI, where readings above 50.0 signal an improvement in business conditions compared to the previous month, and readings below 50.0 indicate a deterioration. The latest PMI reading of 51.8 marked the best performance since January 2023, up from 50.1 in April, signalling a moderate improvement in the health of the private sector economy.

This strengthening of private sector conditions was largely due to a turnaround in inflationary pressures at Kenyan companies. After experiencing record-high rises in costs in late 2023, May survey data showed a fall in overall input prices for the second consecutive month, marking the fastest decline outside the 2020 COVID-19 lockdown. Panellists attributed this drop mainly to lower fuel prices and a decrease in import costs, as the shilling-dollar exchange rate remained strong.

With costs falling, Kenyan firms increased their output for the first time since February, achieving a solid pace that was the quickest in 20 months. The firms also saw a renewed uplift in new order inflows as falling inflationary pressures led to stronger customer spending. The rate of sales growth was the fastest recorded since January 2023.

However, the expansion in output was not universal. The services, manufacturing, and wholesale & retail sectors registered growth, while agriculture and construction saw output decrease, impacted by heavy rainfall and floods.

Amid rising sales and output requirements, Kenyan firms increased their purchasing activity at a quicker rate in May. This was the fastest rate of purchasing growth in 20 months, contributing to a stronger uplift in inventories. Additionally, firms hired more workers for the fifth consecutive month.

After a decline in April, average prices charged by private sector firms rose slightly in May. This increase was broadly related to improving margins, though many firms reported passing on cost reductions to clients.

Commenting on the findings, Christopher Legilisho, Economist at Standard Bank, said, “Private sector activity steadied in April, following a soft print in March. Output and new orders were neutral during the month as firms reported a balanced inflow of new business despite concerns from some businesses about the heavy rainfall across the country. We share these concerns and worry that growth will slow in Q2:24 because of the widespread devastation and disruptions caused by the heavy rain.

“Private sector activity was surprisingly strong in May, implying a further improvement in economic activity, as we had expected to see some impact from the recent floods. Output and new orders recorded strong gains in May as firms reported increased consumer demand. There were expansions in the services, manufacturing, and wholesale and retail sectors. However, heavy rains saw output decline in the agricultural and construction sectors.

“Job creation continued for a fifth successive month amid larger workloads and new business prospects. Firms also purchased larger quantities, raising their inventory levels and improving their buffers.

“Encouragingly, input prices fell in May for a second month, with respondents noting a decline in fuel prices and lower import costs due to a more favourable exchange rate. Meanwhile, output prices increased only slightly. This aligns with our view that inflationary pressures have eased. Nonetheless, wage pressures remained prevalent as firms continued to hire because they foresaw improved demand.

“Though firms are positive about expectations over the next 12 months, this optimism is still well below the long-term average.”