Easing inflation boosts private sector vigour to 6-month high

 

Business activity expanded across the Kenyan private sector in February, as easing inflation boosted new order volumes.

The latest Standard Bank private sector index attributes this to lower fuel prices which cooled input cost inflation to a 26-month low, supporting the softest increase in output prices for 18 months.

Private sector activities have been on the rise since last December hitting above the neutral 50 points for the first time since last August.

The Purchasing Managers’ Index (PMI) rose to 51.3, up from 49.8 in January, the highest level in just over a year, with positive directional influences seen in all five of its sub-components.

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

Christopher Legilisho, Economist at Standard Bank SAYS there was a notable expansion in private sector activity in February, with output increasing in agriculture, manufacturing, and services.

However, construction wholesale and retail activity slipped. Firms noted improved consumer demand as assisting higher output and new orders.

“Increased new orders spurred inventory stocking, with some firms statedly wanting to avoid product shortages during the year. However, expectations for 2024 remain subdued; the index for future expectations hit its weakest level on record,'' Legilisho said. 

Output levels mainly expanded due to a fresh increase in new business intakes at Kenyan companies during February.

Though mild, the rate of growth was the fastest observed in just over a year. Panelists often related higher new orders to greater client demand, new products and improved stocks.

"That said, high prices and weak cash flow reportedly dampened growth."

According to the report, a cooling of purchase price pressures again mostly drove softening input price inflation.

February data shows a sharp increase in average purchase costs, but one that was the weakest seen for 14 months.

While firms pointed to upward pressure from weak exchange rates and higher tax burdens, this was partly offset by lower fuel prices.

Legilisho supports these views, saying that firms noted both input and output price pressures easing due to moderating purchase costs, fuel prices declining, and the shilling appreciating during February.

"Staff costs were flat in February, although staffing levels increased for a second month running.”

The greatest movement was found in the Output sub-index in February, which rose to its highest for 13 months and pointed to a moderate expansion in private sector activity.

Firms additionally linked this to new product releases and improved stock levels, which rose slightly, as well as the positive impact of relaxed inflationary pressures.

Notably, input costs faced by Kenyan firms rose at the weakest pace in over two years in February, as inflation continued to ease from its record high last October.

Falling fuel prices were reportedly a key contributor to lower cost burdens, although expenses still rose sharply overall amid mentions of currency issues and higher VAT payments.

"The slowdown allowed firms to raise their selling charges to a softer degree. Charge hikes eased to the weakest recorded for a year-and-a-half and were aligned with the survey's long-run trend."

Nevertheless, rising prices continued to restrict cash flow and spending power, according to survey comments, which meant that total sales growth was only marginal.

Sector data signaled that construction and wholesale and retail were still greatly impacted, with sales declining sharply in these segments.

Furthermore, overall business sentiment was at its lowest level on record in February, as companies generally refrained from projecting an increase in activity over the coming year.

Only six per cent of companies were optimistic about an upturn.

Despite this, employment levels rose in February on the back of higher new order intakes, with firms citing the hiring of casual workers to meet workloads.

Staff increases were modest, but the fastest since last August.

Purchases of inputs also expanded, ending a five-month run of decline, whereas improvements in supplier performance broadly stalled.

by VICTOR AMADALA