Business confidence drops to a new low on inflation, poll jitters

Mary Nyambura weighing 2 kilograms of floor at the posho mill at Maraba estate in Kakamega town on May 4, 2022. [Benjamin Sakwa, Standard]

Kenyan firms slowed down on hiring in May as business conditions on account of high fuel prices, weakening shilling and input shortages.

It was the second consecutive month where the business environment deteriorated due to multiple factors, which saw business confidence drop to a record low, according to Stanbic Bank’s Purchasing Managers’ Index (PMI) report for May.

The headline PMI fell to 48.2 in May compared to 49.5 in April. Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.

“Economic activity in Kenya contracted for the second consecutive month in May due to inflationary pressures that resulted in a drop in customer demand and a reduction in firms’ output,” said Stanbic Bank Fixed Income and Currency Strategist Kuria Kamau.

“Input price inflation remained at an eight-year high driven by rising fuel prices, higher taxes, and input shortages. Due to higher input prices, firms were forced to scale back on output and employment levels.”

Mr Kamau said the increase in output prices in turn led to a reduction in domestic demand as clients cut back on spending due to the rising cost of living. “Export demand, however, was more resilient as it grew at the fastest rate in three months,” he said.

“Business confidence fell to a new all-time low for the third consecutive month in May driven by uncertainty over supply chain, inflation, geopolitical tensions, and the upcoming elections.”

Inflation in May rose to 7.1 per cent in May from 6.5 per cent in April, according to data by Kenya National Bureau of Statistics.

Stanbic noted that business confidence dropped to a record low.

This has been shrinking over the last three months, which was attributed to uncertainty over supply chains, inflation, geopolitical tensions and the impact on sales in the local market.

According to the report, only eight per cent of respondents forecast an expansion in activity over the coming year.

The business conditions resulted in lower staffing levels overall, with sectors such as manufacturing and retail trade largely affected.

“After a two-month sequence of job creation, the latest data signalled a renewed fall in employment at Kenyan companies during May. That said, the rate of decline was only slight,” the report said. “While some firms reduced their staffing capacity amid lower sales, others added to their workforces to support output and gain new customers.

“At the sector level, lower employment in manufacturing and wholesale and retail contrasted with expansions in agriculture, construction and services.”