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Business Conditions Post Weakest Improvement in 8 Months, Helped by Drop in Household Spending

NAIROBI, Kenya, Mar 3 – Business conditions in Kenya’s private sector posted the weakest rate of improvement in February, compared to the past eight-month run of expansion, following the initial impact of the COVID-19 pandemic.

According to Stanbic’s Purchasing Managers’ Index survey, output growth softened notably in February and was the least marked in the current eight-month sequence of expansion.

Respondents of the survey linked the slowdown to a weaker rise in new order inflows and a drop in household spending.

Purchase prices also rose steeply, led by a hike in Value Added Tax at the start of the year.

This led to a drop in the overall headline index to 50.9 in February, down from 53.2 in January, signaling a weak rate of improvement.

Readings above 50.0 showing improvement in business conditions, while readings below 50.0 show a deterioration.

Commenting on the February survey findings, Kuria Kamau, Fixed Income and Currency Strategist commented said economic activity picked up in January on account of an improvement in customer spending due to improving cash flows in the economy and the re-opening of schools.

“These factors resulted in an increase in output and new orders. While inflationary pressures from the higher VAT and raw material shortages led to a steep rise in output prices, firms are now more positive about an improvement in business conditions over the next 12 months than they were last month,” he said.

During the month, firms raised purchasing activity at the slowest rate for six months, leading to a more modest uptick in inventory levels.

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High competition among vendors drove an improvement in delivery times, although some panellists reported delays
on imported goods due to global supply shortages.

Employment numbers increased only marginally in February, with firms also seeing a softer rise in outstanding work.

Moreover, to maintain current staff levels, some businesses cut workers’ salaries, leading to the fastest drop in average wage costs for seven months.

Nevertheless, cost burdens were driven higher by another sharp increase in purchase prices.

Respondents largely blamed the uptick on a recent hike in VAT, exacerbated by material shortages and higher fuel prices.

Output charges rose for the second straight month in order to maintain firms’ margins.

Business expectations for the year ahead dipped slightly in February, but remained above the level seen through the second half of 2020.

About a third of surveyed firms expect output to rise, linked to plans for expansion and increased marketing activity.

 

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