Business conditions deteriorated in February,cost of living pressures hit sales

The Kenya PMI pointed to a decline in business conditions in the second month of 2023, the first since August last year, as several key metrics fell into contraction territory. Output and new orders both recorded sharp falls, leading to renewed cuts in employment and purchasing. The sharp fall in sales came amid reports that cost-of-living pressures and cash flow problems had stunted customer spending.

At the same time, currency weakness and reports of increased tax burdens fed through to a sharper rise in input costs, and one that was among the fastest seen since the series began in 2014. While some firms passed these costs on to customers, the rate of charge inflation was broadly unchanged from January and much softer than that of input prices.The headline figure derived from the survey is the Purchasing Managers’ IndexTM (PMI). Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.

For the first time in six months, the headline PMI registered below the 50.0 no-change mark in February, dropping to 46.6 from an 11-month high of 52.0 in January. The reading indicated a solid deterioration in operating conditions, driven by renewed contractions in many of the covered metrics.Demand weakness was particularly clear in the latest survey data, as companies reported a sharp contraction in new order volumes following a solid upturn in January. Survey panellists frequently noted that customers had pared back spending due to high inflation and a lack of money in circulation. Firms also suffered from a marked fall in export sales, one of the fastest seen on record.

The downturn in sales led Kenyan companies to make renewed cuts to activity, employment and purchasing in February. Output fell sharply and for the first time in four months, while input purchases fell for the first time since last August. While job losses were only mild overall, they were the strongest seen since April 2021.Supply chain performance was broadly stable in February, ending a prior five- month run of improvement. Some firms mentioned shortages of items such as timber and foodstuffs, as well as delays at ports. The disruption contributed to a fall in stocks of purchases.

Cost pressures accelerated to a notable pace during February, the highest for five months and among the quickest on record. Purchase price inflation was the key driver, according to panellists, amid reports of increased taxes and higher import costs as the exchange rate against the US dollar worsened. Output charges rose accordingly, although the rate of inflation was broadly unchanged from January and much softer than the increase in costs. In contrast to the general trend, business confidence towards future output strengthened markedly in February and was at its highest level in nearly three years.

Mulalo Madula, Economist at Standard Bank commented: “After a stellar performance between September 2022 and January 2023, the Kenya PMI fell into contraction territory in February as cash flow issues and cost of living weighed on demand. With currency depreciation inducing higher import costs and reports of tax burdens, the increase in input costs and consequently output charges (although less than the increase in costs) is amongst the highest since the series began in 2014. But then, while the sales decline was broad based, agriculture is the only sector where sales increased.Notably, the decrease in activity was uneven across firms in various sectors, with 38% of panellists reporting a drop in activity compared with a quarter of respondents reporting an increase. But then, despite everything, businesses are still optimistic about the outlook for the next 12 months, with the future output index rising for the second month in a row.”

Output;
Adjusted for seasonal factors, the Output Index indicated a sharp reduction in Kenyan business activity in February, thereby ending a three-
month run of expansion. Around 38% of panellists reported that activity had decreased over the survey period, against a quarter of respondents that saw a rise. Panellists frequently mentioned that lower demand due to rising prices and a lack of cash flow had led to the drop in activity.

New orders;
After recording growth for five months in a row, new business inflows fell at a marked pace in February, as customers reportedly cut their spending due to rapid inflation. A lack of money in circulation was also cited by survey respondents.Four of the five monitored sectors saw new orders decrease, with particularly sharp falls seen in manufacturing and wholesale & retail. Agriculture was the only sector where sales increased.

New export orders;
Kenyan businesses registered a substantial drop in new export orders midway through the first quarter. In fact, the rate of decline was the fastest seen in the survey’s history (since 2014) outside of the first COVID-19 lockdown. Respondents linked the fall to a number of factors, including increased taxes, adverse weather conditions and currency weakness.

Business expectations;

Despite business activity falling sharply in February, Kenyan firms were more optimistic about their prospects for the coming year.The Future Output Index rose for the second consecutive month and was at its highest level since April 2020. Survey respondents continued to cite plans to expand their businesses through new branches, new products and services and increased advertising. Sector data signalled that the boost to confidence was largely driven by the construction and manufacturing categories.

Employment and Capacity;

Employment;
Lower volumes of new work led companies to reduce their staffing levels midway through the first quarter. Employment fell for the first time in six months and, though mildly overall, at the fastest pace since April 2021. Some firms chose to not replace voluntary leavers, although others registered a rise in employment due to higher sales and branch openings. The decline in staffing was chiefly led by the agricultural sector.

Backlogs of work;
Volumes of outstanding work at Kenyan businesses were largely unchanged in February, after increasing slightly for the first time in three
months at the start of 2023. While some panellists indicated that backlogs had risen due to a cut in workforce numbers, others commented on spare capacity due to weaker demand. Services was the only category to see backlogs rise.

Purchasing and inventories

Stocks of Purchases Index

Quantity of purchases Adjusted for seasonality, the Quantity of Purchases Index fell below the 50.0 neutral mark in February, signalling a reduction in input buying for the first time in six months in line with weaker sales volumes. The solid drop in purchases reflected decreases in four of the five monitored sectors, the exception being agriculture where purchasing levels were unchanged.

Suppliers’ delivery times
Kenyan firms saw little change to supply side conditions over the course of February, shown by the seasonally adjusted Suppliers’ Delivery Times Index registering fractionally below the 50.0 threshold. Some firms continued to record shorter delivery times as vendors competed for sales. On the other hand, there were reports that items such as timber and foodstuffs were in short supply, while some firms mentioned delays at ports.
Stocks of purchases;
Stocks of purchased inputs at Kenyan firms decreased for the first time in six months in February.Moreover, whilst modest, the rate of contraction was the strongest recorded in nearly two years. Panellists often noted that lower demand levels had led them to reduce their stocks

Prices;

Input prices
The seasonally adjusted Input Prices Index rose sharply for the second month running in February, pointing to a marked increase in overall cost burdens at Kenyan companies. Indeed, the rate of input cost inflation was one of the sharpest seen in the survey’s history, with over a third (36%) of respondents seeing costs increase since the previous month. Construction firms saw the most pronounced rise in input prices in February.
Purchase prices;
Higher cost inflation was chiefly driven by purchase prices over the latest survey period, which rose at a sharp and accelerated pace.Where an uptick in purchase prices was recorded, firms often commented that a weaker shilling against the US dollar and increased taxes had led
to a rise in material prices. Some panellists also noted item shortages and higher transport costs.
Staff costs;
Adjusted for seasonal factors, the Staff Cost Index recorded at the 50.0 neutral mark during February, ticking slightly lower from January, to signal no change in salary costs at Kenyan firms. While some companies increased their wages due to the higher cost of living, this was offset by reductions elsewhere amid falling sales. That said, most respondents saw wages remain stable since the start of the year.

Output prices;
Kenyan businesses reported a sharp increase in average prices charged in February, with the rate of inflation ticking up fractionally to a three-month high. Firms largely increased their charges due to higher purchase prices. All five sectors covered by the survey saw an uplift in selling prices, led by agriculture.

Survey Methodology

The Stanbic Bank Kenya PMITM is compiled by S&P Global from responses to questionnaires sent to purchasing managers in a panel of around 400 private sector companies. The panel is stratified by detailed sector and company workforce size, based on contributions to GDP. The sectors covered by the survey include agriculture, mining, manufacturing, construction, wholesale, retail and services. Data were first collected January 2014.Survey responses are collected in the second half of each month and indicate the direction of change compared to the
previous month. A diffusion index is calculated for each survey variable. The index is the sum of the percentage of ‘higher’ responses and half the percentage of ‘unchanged’ responses.

The indices vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease. The indices are then seasonally adjusted. The headline figure is the Purchasing Managers’ IndexTM (PMI). The PMI is a weighted average of the following five indices: New Orders (30%), Output (25%), Employment (20%), Suppliers’ Delivery Times (15%) and Stocks of Purchases (10%). For the PMI calculation the Suppliers’ Delivery Times Index is inverted so that it moves in a comparable direction to the other indices.

Underlying survey data are not revised after publication, but seasonal adjustment factors may be revised from time to time as appropriate which will affect the seasonally adjusted data series.

The Report in details;

KE_PMI_ENG_2303_LITE

For further information on the PMI survey methodology, please contact economics@ihsmarkit.com.
Survey dates;
Data were collected 10-24 February 2023.