Private sector business dropped in first two months of 2020: Report

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Stanbic Bank
PHOTO/COURTESY: Stanbic Bank

Kenya’s private sector economy suffered another difficult month midway through the first quarter of 2020, with February Purchasing Managers’ Index (PMI) data signalling a second successive drop in business activity and the first fall in new orders for over two years.

Households continued to struggle with weak cash flow, causing a notable decline in demand for goods and services. Nevertheless, output prices were raised solidly as firms faced greater cost pressures from inflated raw material prices.

Readings above 50.0 signal in the index highlight an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.

At 49.0 in February, the headline reading pointed to a second successive month of decline in the Kenyan private sector. The index dropped from 49.7 in January, and was the lowest recorded in over two years. Contributing to the decline was a softening in new business at Kenyan firms, marking the first monthly fall since November 2017.

Firms reportedly lost sales due to a lack of money held by domestic customers, amid ongoing cash flow issues in the economy. Foreign sales meanwhile rose at a much softer pace, which panellists sometimes linked to weaker exchange rates.

 Firms subsequently reduced activity further during February, as latest data showed a solid drop in output that was only slightly less marked than in January.

As well as impacting sales, businesses highlighted that weaker cash flow often stalled operations. Consequently, input spending rose modestly, although stocks continued to grow as firms remained hopeful of a rebound in activity in the near future.

“Firms faced a shortage of raw materials owing to reduced imports from China due to the coronavirus outbreak over the past month. This has increased output prices as alternative import markets aren’t as cheap as China. Unfortunately, at this point in time, it’s difficult to assert whether we are at the beginning, middle or end with the coronavirus due to scant and inadequate data points. A scenario where the virus is contained in the next couple of months is probably the best case. However, in the event that there is an escalation into new geographies with the disruption potentially extending into the third quarter of 2020, the likelihood of a global recession then increases. Global supply chains will inevitably be impacted by this which will be detrimental not just for local prices but also for trade in general,” Jibran Qureishi, Regional Economist E.A at Stanbic Bank said in a statement.

 In fact, confidence in the year-ahead outlook neared the highest on record. This optimism, as well as efforts to lower backlogs, led to a quicker increase in employment at Kenyan companies in February. The rate of growth was the strongest since last November, albeit broadly similar to the series trend. Cost pressures meanwhile accelerated to a six-month high, with companies reporting that prices of fuel and foodstuff rose in the latest survey period.

 Firms noted that shortages of raw materials also inflated total costs, linked to reduced imports from China due to the coronavirus outbreak. Supply chain pressures were not evident, however, with vendor lead times improving for the second month in a row.

Despite weaker demand, Kenyan firms raised output prices in February, in a bid to maintain profit margins as cost pressures increased. Moreover, the rate of charge inflation was solid and the fastest recorded since July 2019.

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