Kenya’s private sector suffered its steepest deterioration in almost two years in May as soaring input costs forced companies to raise prices at the fastest pace in two-and-a-half years, pushing customers to tighten their belts, Stanbic Bank's PMI survey shows.

The headline Purchasing Managers’ Index (PMI) from Stanbic Bank and S&P Global fell to 46.6 in May, down sharply from 49.4 in April. Any reading below 50.0 signals contraction, and the latest figure marked the quickest decline in business conditions since July 2024.

The downturn was broad-based, with activity and new orders both contracting at accelerated paces. 

Companies operating within the construction and services sector were particularly hard hit, while the manufacturing industry bucked the trend to record modest growth in production.

Perhaps the most striking signal in the survey was the intensification of inflationary sting which was attributable to historic jump in fuel prices which started mid-April. 

During the month under focus, total input costs across the private sector rose at the sharpest rate since November 2023, driven overwhelmingly by purchase prices, notably for food, fuel and transport.

Panelists surveyed cited the roiling negative impact of the U.S.-Israel war in the Middle East on businesses as an exacerbating factor behind the sharp uptick in costs.

In response, Kenyan companies raised their own selling prices at the fastest pace in 30 months, with the wholesale and retail sector leading the increases. The pace of output price inflation was described as “sharp” and “well above its long-run average”.

Christopher Legilisho, economist at Standard Bank, noted that consumer resistance to spending, coupled with rising costs, had directly contributed to contractions in new orders and output.

“Inflationary pressures have intensified, constraining demand conditions, with input prices, purchase costs and output prices driven up by higher fuel and transportation costs,” Legilisho explained.

Jobs cut for first time in 16 months

The demand slowdown coursing through the industry has started hitting the country's labour market. Kenyan private sector businesses reduced their workforce numbers in May for the first time in 16 months, ending a 15-month streak of new hires.

The decline was concentrated among temporary staff, where contracts were cut short. Panellists reported that companies had sufficient capacity to process new work, a reflection of falling demand, as backlogs of outstanding business contracted for the third consecutive month.

Agriculture and wholesale and the retail segment recorded headcount reductions, while construction and manufacturing added staff during the period. Employment was stable at service providers, the survey shows.

Fuel cost protests cited as disruptive factor

Legilisho offered an additional explanation for the May weakness, pointing to “week-long disruption to business activity because of nationwide protests by transportation sector players that constrained movement”. This suggest that logistical disruptions compounded the demand-side pressures from inflation.

Budget constraints at companies also led to a reduction in input buying, the first decline in eight months, as companies eased efforts to stockpile inventories. Vendor performance continued to improve, however, with suppliers seeking to secure timely payments and retain customers amid subdued demand.

Construction and services lead decline

Sector-level data revealed a two-speed economy. Manufacturing was the only sub-sector to record growth in output, while construction and services saw downturns in both activity and new orders.

Agriculture, manufacturing and wholesale and retail registered growth in new business intakes, but this was offset by sharp contractions in construction and services.

The divergence underscores the uneven nature of the current slowdown, with interest-sensitive and discretionary sectors bearing the brunt of tighter household budgets.

Despite the deteriorating conditions on the ground, Kenyan firms struck a more confident tone about the year ahead. The Future Output Index rose to its highest level since February 2023, with optimism broad-based across all five monitored sectors.

Panellists cited increased advertising, planned investment in product diversification, and expanding online presence as factors underpinning their positive outlook.

However, the report cautioned that the index “remained below the historical average”, suggesting that confidence, while improving, has not yet returned to long-term norms.

Policy implications

The May PMI data presents a challenging picture for Kenyan policymakers. The economy is grappling with slowing activity and rising prices, with little room for either monetary or fiscal stimulus.

The CBK has maintained a tight monetary stance to anchor inflation expectations, but the PMI suggests that higher borrowing costs, combined with cost-push inflation from fuel and transport, are now weighing heavily on private sector demand.

According to Legilisho, however, “despite subdued business momentum, firms remain optimistic about future conditions”. 

Whether that optimism translates into a recovery in the coming months will depend on the trajectory of inflation, the stability of the shilling, and the resilience of household budgets.

For now, the survey paints a picture of an economy losing momentum midway through the second quarter, with consumers pulling back and companies passing on higher costs.

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