Private sector activities fall as production costs hit record high

An employee at leather factory in Nairobi. [Fidelis Kabunyi, Standard]

The record retail prices for fuel, higher taxes and the weak shilling resulted in the costs for raw materials rising at their fastest pace in over a decade last month.

This, in turn, saw manufacturers pass the higher costs to consumers.

The higher costs led to softening demand and as new orders fell and firms made further cuts in staffing numbers, according to the latest Stanbic's Purchasing Managers Index (PMI) released Friday.

"Kenyan private sector firms faced unprecedented inflationary pressures in October driven by a further rise in fuel prices and ongoing currency weakness. Input costs rose at the quickest pace since the survey began nearly a decade ago, leading companies to also increase selling prices at a record rate," said the PMI report.

"Consequently, the latest data signalled a worsening of the demand picture in October as heightened prices eroded spending power and led to a marked fall in new business. Output levels were reduced accordingly, while firms also made their joint-fastest cut to workforces since the middle of 2020." The headline PMI in October stood at 46.2, down from 47.8 in September.

According to Stanbic, readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.

It noted that this is "indicative of a solid deterioration in the health of the private sector."

The rate of decline was the second-fastest since August 2022 and close to the marked downturn seen in July. Nearly half of the firms that were surveyed said they had witnessed an increase in expenses over the month owing to higher fuel prices, higher taxes and a weak shilling.

"Business conditions worsened amid a rapid pick-up of cost pressures across the private sector economy, with survey data signalling the strongest rise in input prices since data collection started in 2014," said the report.

"Around 46 per cent of monitored firms reported that total expenses had increased from September, driven by a further uplift in fuel prices and associated transport costs."

It added: "In addition, companies noted that ongoing currency weakness and increased tax burdens had added to costs. To maintain sufficient margins, Kenyan companies also reported an unprecedented increase in selling prices in October, with the rate of inflation climbing above the previous high in mid-2022."

Companies also cut the number of people they are hiring to reduce their exposure following the reduced demand. The report noted that the level of job cuts is similar to what was seen in June 2020, when the reality of Covid-19 was dawning on many companies.

"In response to lower levels of output and new orders, Kenyan private sector firms reduced their staffing numbers for the second month running in October. The rate of job cuts accelerated to a solid pace that was the joint-quickest since June 2020," said the report.