Business conditions in the country deteriorated in February as the high cost of living and cash flow challenges among businesses significantly slowed down private sector activity.
This led to companies cutting jobs, with employment falling for the first time in six months and at the fastest rate since April 2021, according to Stanbic Bank's Purchasing Managers' Index (PMI).
The PMI, which measures the performance of key sectors of the economy, shows new orders also fell substantially as consumers cut back due to high inflation and lack of money in circulation.
Export-oriented businesses also reported a major dip in new orders during the period, with the survey noting that 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.
The headline PMI was 46.6, the worst since August last year. Readings above 50.0 signal an improvement in business conditions in 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," said Stanbic in the report.
"The reading indicated a solid deterioration in operating conditions, driven by renewed contractions in many of the covered metrics."
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... the decline in staffing was chiefly led by the agricultural sector," the report said.
Inflation in February rose to 9.2 per cent from nine per cent in January, going up for the first time since October, which led to a sharp fall in sales.
The weak shilling and increased tax burdens led to a sharper rise in input costs, according to PMI, and one that was among the fastest seen since the series began in 2014.
"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," said Mulalo Madula, an economist at Standard Bank.
"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."
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 per cent of panellists reporting a drop in activity compared with 25 per cent of respondents reporting an increase," said Madula.
"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."