Kenyan businesses slipped back into contraction in August as supply shortages, rising costs and liquidity constraints forced companies to cut output and scale back purchases, even as customer sales continued to rise.
The latest Stanbic Bank Kenya Purchasing Managers’ Index (PMI) fell to 49.7 in August from 51.3 in July, signalling a marginal deterioration in private sector operating conditions and ending a brief recovery that had seen the index rise above the 50-point growth threshold for the first time in five months.
A reading above 50 signals an improvement in business conditions from the previous month, while one below that level points to a deterioration.
The August decline was driven largely by reduced output and falling stocks of purchases, highlighting the pressure facing companies as they struggle to convert improving demand into increased production.
Business activity declined for the sixth consecutive month, with the pace of contraction accelerating to a solid level in August.
This came despite private sector firms reporting increased new orders for the third month running, although the growth in sales was weaker than that recorded in July.
Companies attributed the rise in sales to bulk buying by customers, increased advertising and stronger demand for private healthcare services amid public sector strikes.
However, the improvement in demand has yet to translate into higher production, with firms citing the high cost of inputs, limited liquidity and shortages of key materials as major constraints.
The survey showed that companies were increasingly unable or unwilling to purchase sufficient inputs to meet demand, leading to a further decline in production and purchasing activity.
Input buying fell for the fourth consecutive month in August, with the rate of decline accelerating to its fastest pace in just over a year.
Stocks of purchases also declined, recording their sharpest fall in three-and-a-half years, although the overall contraction remained modest.
The slowdown in purchasing, however, helped ease pressure on supply chains. Kenyan firms reported shorter supplier delivery times for the first time in three months, although shortages of some materials continued to limit the improvement.
The mismatch between rising orders and falling output also resulted in a continued accumulation of unfinished work.
Backlogs increased at one of the strongest rates seen in more than five-and-a-half years, despite the pace of accumulation easing from June.
Businesses responded to the growing capacity pressures by increasing employment for the third consecutive month.
Workforce numbers expanded at an above-average pace as companies sought to strengthen their ability to handle growing workloads and position themselves for an anticipated improvement in business activity.
The employment gains and rising order books were also reflected in a sharp improvement in business confidence.
Firms expressed their strongest optimism about future output since February 2023, with companies pointing to planned investment in marketing, expanded production capacity, product diversification and new technology as key drivers of expected growth over the next 12 months.
Cost pressures also showed some signs of easing, offering businesses a potential boost heading into the final months of the year.
Although input price inflation remained marked, the pace of cost increases slowed to its lowest level since April.
Higher fuel and transport costs continued to weigh on businesses, while wage costs rose at a historically sharp pace.
Companies continued to pass part of the increased costs on to customers in an effort to protect profit margins, although the pace of price increases eased to a four-month low.
“Inflationary pressures remain elevated. Still, the moderation in input and output price inflation from June peaks may imply gradual disinflation. However, rising wage costs are broadening price pressures beyond raw materials," said Christopher Legilisho, Economist at Stanbic Bank.
"Therefore, underlying inflation may prove sticky as firms pass these increases on to consumers. This may well play out, particularly if demand remains robust. Further, sustained cost pressures may continue to weigh on margins as well as delay a stronger output recovery.”
The August PMI data therefore paints a mixed picture for Kenya's private sector, with improving sales, rising employment and stronger business confidence being offset by production constraints, weak purchasing activity and persistent cost pressures.
The key challenge for businesses will be whether easing input inflation and improving supply conditions can allow firms to rebuild inventories and increase output fast enough to meet recovering customer demand.
