Kenya’s private sector slipped into contraction in March 2026, signalling a shift in business conditions after six consecutive months of expansion, according to the latest Stanbic Bank Kenya Purchasing Managers’ Index compiled by S&P Global.
The headline PMI dropped to 47.7 in March from 50.4 in February, falling below the 50.0 threshold that separates growth from contraction. This marks the first deterioration in operating conditions since August 2025 and extends a four month downward trend in the index.
The data points to a demand driven slowdown, with businesses reporting reduced consumer spending, constrained cash circulation, and tighter household budgets. Firms across multiple sectors indicated that customers are increasingly financially stretched, resulting in lower order volumes and subdued sales activity.
Compounding domestic pressures, the ongoing conflict in the Middle East has emerged as a significant external shock. Businesses cited disruptions to international logistics, rising fuel costs, and higher shipping expenses, all of which have fed into elevated input costs and operational uncertainty.
Output and new orders decline sharply
March data shows a broad based decline in both output and new orders, reversing gains recorded over the previous half year. The contraction in new business was the most pronounced since July 2025, with service sector firms particularly affected.
Companies responded by scaling back production levels, aligning output with weaker demand conditions. Wholesale and retail was the only sector to register marginal growth, highlighting uneven performance across the economy.
Cost pressures intensify amid weak pricing power
Input costs rose at the fastest pace in over two years, driven by higher taxes, fuel prices, and transport costs. Agricultural firms and wholesale and retail businesses reported the sharpest increases in purchasing costs.
Despite this surge in input prices, firms showed limited ability to pass costs on to consumers. Output prices increased only marginally, with some sectors such as manufacturing and construction even reporting declines in selling prices. This reflects heightened competition and fragile demand, which continues to suppress pricing power.
Labour market resilience softens
Employment levels continued to expand in March, though at a significantly slower pace. Job creation was largely supported by the agricultural sector, while construction and services firms either reduced hiring or paused workforce expansion.
Backlogs of work declined at the fastest rate in nearly six years, indicating reduced pressure on business capacity and further underscoring the slowdown in demand.
Inventory adjustments and improved supplier performance
Firms adopted a cautious approach to inventory management, reducing stock levels for the first time in eight months. This reflects efforts to manage cash flow constraints and avoid excess inventory amid uncertain demand.
At the same time, supplier delivery times improved, supported by weaker demand and increased competition among vendors. This marks a modest easing in supply chain pressures compared to previous months.
Business confidence remains cautiously optimistic
Despite current headwinds, Kenyan businesses remain cautiously optimistic about the outlook. Around 21 percent of surveyed firms expect output to grow over the next 12 months, supported by expansion plans, increased marketing efforts, product diversification, and investment in capacity.
According to Stanbic Bank Kenya economist Christopher Legilisho, the March data reflects a combination of demand side and supply side pressures.
“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. Output and new orders declined in most sectors, implying that businesses expect to be constrained by disruptions from geopolitical tensions,” he noted.
Outlook
The March PMI signals a fragile operating environment for Kenyan businesses as they navigate a combination of domestic demand constraints and global economic shocks. While cost pressures remain elevated, limited pricing power and cautious consumer behaviour are likely to continue weighing on profitability in the near term.
However, underlying business optimism and planned investments suggest that firms are positioning for recovery, contingent on improvements in both domestic economic conditions and global stability.
