Businesses remain wary despite increased consumer spending

Traders at Soko Mjinga Market in Nyeri. [Kibata Kihu, Standard]

Confidence in the Kenyan economy among companies remained weak in December, with a majority of business leaders shelving plans to expand operations in the New Year.

This is despite a growth in purchasing power among customers, which saw firms register increasing business as orders from customers rose in December.

According to Stanbic's Purchasing Managers' Index (PMI), only five per cent of the executives interviewed for the survey said they plan expansion over the next year.

While the PMI showed a slight improvement in private sector activity in December lifted by more orders, increasing their output and hiring more, low levels of confidence among business leaders could suggest uncertainty.

With only five per cent of firms surveyed planning to expand, it is the second-lowest level of confidence recorded since PMI started tracking business activities in the country in January 2014.

The lowest was September last year, with only four per cent of the firms polled saying they planned to expand.

"Private sector business confidence was relatively muted at the end of the year. Sliding for the second consecutive month, the level of sentiment regarding the 12-month activity outlook was the second-lowest in the survey's history (ahead of September)," said the Stanbic PMI Survey.

"Only five per cent of companies expected to expand output in 2025, mostly through new branches, additional services and increased marketing, according to qualitative evidence."

According to the report, the headline PMI - which through surveys of executives in different sectors provides insights on the economic direction - stood at 50.6 in December.

This, the report noted, indicated a marginal improvement in the health of the Kenyan private sector. The index had dropped from 50.9 in November but was above the 50.0 neutral mark for the third month running.

Stanbic explains that readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 indicate a deterioration.

The slight improvement in private sector activity was largely driven by new orders, which the survey report attributed to growing purchasing power among customers. The increase in orders has also been despite increased pass-through costs of purchase prices as firms sought to protect profit margins

"The positive PMI reading was driven by three of its sub-components, as output, new orders and employment all expanded for the third straight month. Notably, this marked the first full quarter of private sector output growth since the final quarter of 2021," said the report.

"Business output generally rose due to an increase in new order intakes. Several panellists mentioned an improvement in purchasing power at customers, alongside new bookings and successful advertising campaigns. Rising demand helped to sustain the current trend of input buying growth in December, with a rise in purchases registered for the fifth month in a row. Furthermore, the increase was the sharpest recorded since September 2022."

Christopher Legilisho, an economist at Standard Bank, noted that the private sector activity remained resilient despite a challenging year.

"Positively, this is the first quarter of expansion in output since the fourth quarter of 2021, suggesting that the private sector is showing signs of turning around with new orders and employment also in expansionary territory," he said, adding that increased customer sales pointed to an improvement in purchasing power.

"The PMI also signals healthy growth in purchasing plans in December with a drop in inventories as firms push to clear stocks in the construction and wholesale and retail sectors.

"On the macroeconomic front, we end the year with relative stability, a stable exchange rate, inflation at levels last seen 17 years ago, and interest rates declining for government. On the downside, private sector confidence in the business outlook for the next 12 months is still quite weak."