Kenya’s cooling labour market still warm enough – PMI

Employment numbers in the Kenyan private sector dropped for the fourth consecutive month in December last year, a survey showed today, as businesses struggled with soaring costs instigated by high fuel prices.

And while the latest Kenya PMI findings signalled a strong move towards stability in private sector business conditions in December, helped by a considerable cooling of inflationary pressures, challenges still persist.

The headline PMI moved three points higher during the month under review, up to 48.8 from 45.8 in November, to signal a modest and softer decline in operating conditions across Kenya.

Private sector conditions have now deteriorated for four months running, although the latest decline was the weakest in this sequence.

Read: Kenya private sector activity contracts for third month in November 2023

The Stanbic Bank Kenya Purchasing Managers’ Index (PMI) fell to 45.8 last month, from 46.2 in October. Readings above 50.0 signal growth in business activity, while those below point to a contraction.

The performance of Kenya’s private sector started to decline in September, and the latest monthly reading is one of the weakest since the series began almost a decade ago, the survey said.

Firms across the private sector noted that rapid inflation had again suppressed demand and created cash flow challenges, leading to further cuts in activity, staffing and purchasing.

On the supply side the survey noted that Kenyan firms continued to see a shortening of delivery times on purchased items at the end of the year.

The improvement was modest and slower than the long-run trend, but also the strongest since August. Survey panelists often mentioned that vendors provided items more quickly in order to gain customers and improve cash flow.

“The Purchasing Managers Index (PMI) improved in December, despite still difficult business conditions for the private sector.

Service sector companies reported an uplift in activity while declines persisted particularly in manufacturing and construction sectors, as firms continued to signal cost-of-living pressures and weak demand conditions,” noted Christopher Legilisho, Economist at Standard Bank.

Adding that, “Inflationary pressures are noted to have eased, amid better cash flow prospects for clients.

The rate of job declines also softened compared to previous months with the agricultural sector seeing an increase in hiring.”

The survey further noted that Kenyan businesses reported elevated inventories, with a slowdown in price increases in December.

Firms indicated that input costs and purchase cost pressures were primarily due to higher taxes among other factors. Similarly, there was notable reprieve from fuel and transport costs that moderated during the month.

Still, business expectations for the year ahead remain quite weak based on the survey results from respondents.

December survey data also highlighted a marked slowdown in input cost inflation across the private sector. After reaching a survey-record peak in October, the rate of inflation slowed for the second month running and by the greatest degree ever recorded.

While firms indicated that currency weakness and tax burdens continued to lift overall input costs, the settling of fuel prices somewhat alleviated the rise – and that could still be on the cards if the energy regulator – EPRA makes good its promise to further slash fuel prices in its anticipated January 14 announcement.

The drop in employment levels was also tempered at the end of the year, with the latest data indicating the softest fall since September. Agriculture was the only sector to see a rise in staffing.

However, Kenyan businesses were less optimistic about future activity in December, with the degree of confidence slipping to a seven-month low. Expectations were also among the lowest seen on record, with just 11% of panelists predicting growth over 2024.

The Year Ahead – Predictions 

The World Bank has projected Kenya’s economy to grow at a faster rate of 5.2 percent this year, boosted by increased private sector investment as the government reduces its borrowing from the domestic credit market.

This is a faster growth than the 5.0 percent it estimated earlier.

According to the latest Global Economic Prospects, a World Bank Group flagship report, growth in non-resource-rich countries such as Kenya is projected to strengthen to 5.4 percent in 2024 and 5.7 percent in 2025.

“Increasing investment is expected to drive growth in Kenya and Uganda, partly owing to improved business confidence,” says the report.

Kenya’s economy grew 5.9% year-on-year in the third quarter of 2023, compared to 4.3% growth in the same quarter of 2022.

“This growth was mainly supported by a rebound in agricultural activities that had contracted in 2022,” reads the Kenya National Bureau of Statistics (KNBS) report.

Also read: Kenyan inflation dips to 6.8 year-on-year in November

Similarly, the country’s overall year on year inflation rate as measured by the Consumer Price Index (CPI) stood at 6.6 per cent in December 2023 compared to 6.8 percent a month earlier.

Consumer Price Index (CPI) is a key macroeconomic indicator used to monitor price movements and how they affect policy decisions.

It is defined as a measure of the weighted aggregate change in retail prices paid by consumers for a given basket of goods and services.

Year-on-year inflation is used mainly for economic decision making as current situation is compared to previous year situation, same period. Inflation rate is defined as a percentage change of the CPI between two periods.

The CPI and inflation are generated from data collected through monthly surveys of retail prices that target a representative basket of household consumption goods and services.

The data collection is conducted in the second and third weeks of the month from a sample of outlets located in 50 data collection zones across the country.