The private sector in Kenya in May recorded a softer improvement in operating conditions according to the Purchasing Managers Index by Stanbic Bank. This was reflected by softer expansions in output, new orders, and employment.

On the price front, cost inflationary pressures also eased since April. On the other hand, firms raised their output charges at a marked pace that was the strongest in three months amid favorable demand conditions.

The headline figure derived from the survey is the Purchasing Managers’ Index™ (PMI™). Readings above 50 signal an improvement in business conditions on the previous month, while readings below 50 show a deterioration.

Main findings

The seasonally adjusted PMI fell from April’s 27-month high of 56.4 to 55.4 in May. Despite softening, the latest reading signaled a sharp improvement in operating conditions. Notably, the headline index was above the historical average (52.8).

Output rose midway through the second quarter, thereby stretching the current period of expansion to six months. Slightly easing from April’s survey record, the rate of growth remained strong and above the series average.

According to anecdotal evidence, favorable economic conditions and strong underlying demand were the key factors behind the latest expansion.

Mirroring the trend for output, new business placed at Kenyan private sector firms rose for the sixth month in succession in May. Despite softening from April’s 16-month high, the rate of growth remained sharp overall.

Panelists attributed new client wins to stronger market demand. Amid reports of stronger demand from international markets, growth in new export orders also remained strong.

Purchasing activity rose sharply on the back of robust client demand. In fact, growth was only slightly slower than the survey record seen in April. Pre-production inventories across Kenyan firms rose as a result, and at a marked pace.

In response to greater output requirements, firms raised their staffing levels during May. That said, jobs growth moderated from April’s 16-month high and was only marginal. Meanwhile, outstanding business across the Kenyan private sector was unchanged in May, thereby ending a two-month period of growth.

On the price front, firms continued to face higher input costs during May. According to anecdotal evidence, firms faced upward cost pressures mainly due to higher demand and a limited supply of raw materials. Meanwhile, wages rose at a modest pace.

 Subsequently, firms raised their average selling prices for the sixth consecutive month in May. Output charge inflation was sharp and the strongest in three months. Anecdotal evidence indicated that improving demand helped firms to pass higher costs through to clients.

Commenting on May’s survey findings, Jibran Qureishi, Regional Economist E.A at Stanbic Bank said that Private sector activity rose however at a slightly slower pace.

“Nonetheless, the recovery in business activity over the past 5 months is notable,” Qureishi said.

The economist says all eyes will now shift towards the FY2018/19 budget that will be read later this month.

“The market will be keen to see what measures the government will put in place to consolidate its public finances, something that is long overdue,” he said adding that any additional details of the Financial Market Conduct Bill will also be sought out for given the broad concern currently that the draft Bill may not result in a more favourable environment for credit extension to the private sector and also that it may not amend the complications with monetary policy signaling that the current interest rate capping law framework has brought about.