Kenya’s private sector showed signs of stabilising in June after three consecutive months of contraction, supported by a modest recovery in new business.
Firms however grappled with record-high selling prices driven by rising fuel-related costs.
The latest Stanbic Bank Kenya Purchasing Managers’ Index (PMI), compiled by S&P Global, climbed to the neutral mark of 50.0 in June from 46.6 in May, signalling that business conditions neither improved nor deteriorated overall during the month.
The reading marks the end of a three-month downturn but highlights an economy still struggling with inflationary pressures and subdued production.
The survey shows that although customer demand began to recover, higher operating costs, supply bottlenecks and cautious spending continued to weigh on business output.
Business activity contracted for the fourth consecutive month, albeit at a slower pace than in May, as companies cited weak customer footfall, supplier capacity constraints and reluctance to purchase inputs because of escalating costs and limited cash flow.
At the same time, new orders returned to growth for the first time since February, with firms attributing improved sales to customer referrals, marketing campaigns and business expansion initiatives.
The divergence between recovering demand and declining output led to a sharp increase in unfinished work, with backlogs rising at their fastest pace since October 2019.
Businesses also reported supplier delivery delays caused by product shortages and transport challenges as higher fuel costs made vendors reluctant to dispatch goods before filling transport capacity.
Inflationary pressures intensified sharply during the month, emerging as the biggest concern for businesses.
Around 41 per cent of surveyed firms reported higher input costs, pushing overall cost inflation to its highest level since November 2023.
Companies blamed increased fuel prices alongside rising costs of food products, paper, information technology equipment and construction materials.
The surge in costs forced firms to pass the burden to customers, resulting in the fastest increase in selling prices since the Kenya PMI survey began in 2014.
About a quarter of businesses raised prices during June compared with only two per cent that reduced them, reflecting widespread efforts to preserve profit margins amid escalating operating expenses.
Despite the challenging environment, businesses expressed their strongest optimism in more than three years.
The Future Output Index rose to its highest level since February 2023, with approximately one-third of respondents expecting activity to increase over the next 12 months, while only one per cent anticipated a decline.
Companies expect growth to be driven by expansion into new domestic and export markets, greater investment in technology, increased advertising and hopes that fuel prices will ease in the coming months.
Improved confidence encouraged firms to expand payrolls and rebuild inventories.
Employment increased at a moderate pace after declining slightly in May as companies hired additional workers to cope with stronger order books and rising capacity pressures.
Businesses also raised stock levels for the third consecutive month, partly to guard against future shortages and partly because of expectations of stronger demand later in the year.
However, purchasing activity remained subdued as firms continued to cut spending on inputs because of elevated prices and lingering effects of weak demand experienced earlier in the year.
Wholesale and retail businesses together with agricultural firms recorded the sharpest reductions in purchasing volumes.
Stanbic Bank economist Christopher Legilisho said the June survey points to an economy beginning to recover, although rising costs remain a significant risk.
“The Stanbic PMI for June was upbeat on signs of a recovery after three months of weakness. Firms’ new orders grew due to robust sales volumes. However, output conditions remained subdued on concerns of soft client demand and rising price pressures,” he said.
Legilisho warned that persistent supply-side constraints and rising production costs could delay a stronger recovery, although falling international oil prices could eventually provide relief to businesses by lowering transport and operating expenses.
The June PMI hence paints a picture of a private sector emerging cautiously from recent weakness, supported by improving demand and growing business confidence, but still constrained by stubborn inflation, supply disruptions and elevated operating costs that continue to squeeze profitability.
