Kenya’s PMI Drops to 49.7 in August as Firms Cut Output

Kenya’s Stanbic Bank Kenya Purchasing Manager’s Index(PMI) fell to 49.7 in August, signalling a decline in operating conditions for Kenyan firms for the first time in three months in August. This is supply shortfalls and cost saving measures prompted Kenyan firms to reduce their output and purchases.

“Kenya’s Stanbic Bank PMI weakened in August due to momentum loss in the private sector as elevated raw materials costs and tight cash flows constrained firms’ ability to translate stronger demand into output,” said Christopher Legilisho, Economist at Stanbic Bank.

Kenyan firms fail to meet rising demand

Nevertheless, new orders proved resilient due to bulk purchasing, advertising, and demand for private healthcare. Robust hiring and continued optimism about planned investment imply that Kenyan firms expect activity to strengthen.

“However, the divergence between demand and production indicates any near-term recovery as still being constrained by high operating costs and inadequate liquidity,” said Legilisho.

The contraction in Kenya’s private sector business activity accelerated since July, despite firms receiving greater sales volumes for the third straight month. Moreover, employment increased again and business confidence regarding future output was the strongest observed in three-and a-half years.

PMI Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show deterioration.

After rising above the 50.0 no-change mark for the first time in five months to 51.3 in July, the headline PMI fell to 49.7 in August, signalling a marginal deterioration in operating conditions.

This was due to reductions in output and stocks of purchases, as well as a loosening of supply pressures as demand for inputs dropped. Output decreased for the sixth consecutive month in August, and the contraction accelerated to a solid pace.

As was the case in both June and July, companies lowered their activity in spite of an improvement in customer sales.

Indeed, the total volume of private sector new orders increased for the third straight month in August, albeit to a lesser extent than in July.

Survey panellists often commented on bulk-buying at clients and increased sales through advertising, with a rise in private sector healthcare demand also noted amid public sector strikes.

The mismatch between output and new orders was again widely associated with a high inflation environment, as companies struggled to purchase inputs due to rising prices and limited liquidity. Output also decreased due to some key material supply shortages, according to some panellists.

Input constraints and cost considerations also underlined a reduction in purchasing activity. August data indicated a decrease in input buying for the fourth month in a row, and the rate of decline accelerated to the fastest in just over a year.

Stocks of purchases subsequently declined in August. In fact, the downturn was the steepest recorded in three-and-a-half years, albeit modest overall.Positively, a lack of buying activity reportedly eased pressure on supply chains.

Kenyan companies reported quicker lead times for the first time in three months, although the degree of improvement was relatively mild amid shortages of some materials. Backlogs of work at Kenyan companies continued to increase at an historically strong pace midway through the third quarter. The rate of accumulation eased further from June, but was still the third-sharpest in over five-and-a-half years.

Firms attempted to soften capacity pressures by raising employment, with workforce numbers increasing at an above-average pace for the third straight month. Output expectations ticked up to their highest level since February 2023. Firms with a positive outlook largely related this to planned investment into marketing, capacity improvements, product diversification and new technology.

Kenyan Companies were also encouraged by a softening of cost pressures. Although marked overall, the rate of input price inflation fell to its lowest since April. Higher costs relating to fuel and transport continued to be highlighted, while there was a much quicker and historically sharp uplift in overall wage costs.

Firms tended to hike their charges to safeguard profit margins, albeit with the rate of increase easing slightly to a four-month low.