Kenya's private sector activity returned to growth trajectory in July for the first time since February, the latest Stanbic Bank Kenya Purchasing Managers' Index shows, indicating a turning point after four months of stagnation.

During the month under focus, the survey shows private sector companies continued to sustain operational challenges, constraining output across firms.

The headline PMI rose to 51.3 in July from 50.0 in June, crossing the 50.0 threshold that separates expansion from contraction. 

This improvement was driven by the strongest increase in new orders since January, as businesses reported successfully attracting more customers through referrals, marketing push and new product launches.

However, the survey revealed a notable divergence between demand and output. While new work inflows expanded for the second consecutive month, output contracted for the fifth straight month, albeit at the slowest pace in that sequence. 

The mismatch reflected ongoing challenges including elevated inflationary pressures and their knock-on effects on liquidity, which prevented companies from fully capitalising on stronger demand conditions.

"The headline gain was mainly driven by stronger new orders and modest short-term hiring, implying that firms are responding to pockets of demand and near-term workload pressures," said Christopher Legilisho, Economist at Stanbic Bank. 

"However, output stayed subdued as elevated inflation, higher input costs and tight cash flows constrained production."

Employment trend

During the month, jobs increased the fastest pace so far this year, with firms predominantly turning to short-term hiring to address mounting workloads. 

The buildup of unfulfilled orders was attributed both to the output-demand mismatch and delays in receiving imported components.

Data from the labour market suggests that businesses are responding to pockets of demand even as they remain cautious about making long-term commitments. 

Kenya's private sector has been under pressure for much of the year, with the PMI having registered below 50.0 in March, April and May before stabilising at the neutral 50.0 in June.

Despite the improvement in business conditions, cost pressures continue to weigh on the private sector. Overall input cost inflation remained elevated in July, cooling only marginally from June's 31-month peak. 

Approximately 37 percent of companies reported higher operating expenses during the period, driven primarily by surging transportation costs, elevated fuel prices and material shortages stemming from the Middle East conflict.

However, selling price inflation moderated from June's record high to its slowest pace since April, as only 15 per cent of firms raised their charges. This reflects concerns about maintaining profit margins in a price-sensitive market, with some firms absorbing costs to protect demand while others focused on preserving margins.

"Output price inflation softened, even as input cost pressures remained elevated, implying that some firms absorbed costs to protect demand, while others remained focused on preserving margins," Legilisho said.

Meanwhile businesses saw a decline in supplier performance for the second straight month, with delivery times lengthening slightly due to input shortages and rising costs. This prompted mixed inventory and purchasing strategies across the private sector. Some firms increased stocks to buffer against shortages and meet stronger demand, while others reduced holdings to preserve capital and cut costs.

"Stocks purchased and inventories were broadly stable, implying that firms took divergent approaches to increasing orders: some drew down existing stocks, while others rebuilt inventories in anticipation of firmer demand," Legilisho noted.

Despite the operational challenges, future expectations brightened considerably in July, with overall sentiment rising to its highest level since February 2023, a span of just under three-and-a-half years. Positivity towards future output was supported by uplifted demand projections, business diversification plans, innovation and supply chain optimisation efforts.

The surge in optimism is notable given the challenging macroeconomic environment, including persistent inflationary pressures and global uncertainty. It suggests that business leaders are beginning to see light at the end of the tunnel, even as the recovery remains uneven.

[email protected]