Lower pump prices, strong shilling lift firms' activity in May

Lower fuel prices and a strong shilling led to improved business conditions in May, lifting private sector activity.

Production levels rose at the sharpest rate in 20 months in May, while new business orders grew for the first time since February.

The improved conditions, according to Stanbic's Purchasing Managers' Index (PMI), led to an increase in new jobs by businesses.

The survey showed that May marked the fifth successive monthly rise in job numbers by Kenyan companies.

It further noted that firms generally reported hiring casual employees to support new business and marketing.

The survey also showed a sharp drop in the cost of raw materials, which according to the PMI, input prices in May fell for the second month running "and the fastest ever outside of the 2020 Covid-19 lockdown."

Lower pump prices and decreases in import costs due to a strong shilling were among the factors that saw a drop in input costs.

PMI measures the prevailing direction of economic trends in different sectors. According to the survey, headline PMI stood at 51.8 in May, which according to Stanbic marked the index's best performance since January 2023.

It had increased from 50.1 in April, which according to the survey signalled a moderate improvement in the health of the private sector economy.

Stanbic explained that readings above 50.0 signal an improvement in business conditions over the previous month, while readings below 50.0 show a deterioration.

"Private sector activity was surprisingly strong in May, implying a further improvement in economic activity, as we had expected to see some impact from the recent floods. Output and new orders recorded strong gains in May as firms reported increased consumer demand. There were expansions in the services, manufacturing, and wholesale and retail sectors. However, heavy rains saw output declining in the agricultural and construction sectors," said Christopher Legilisho, an economist at Standard Bank.

"Job creation continued for a fifth successive month amid larger workloads and prospects of new business. Firms also purchased larger quantities, raising their inventory levels and improving their buffers."

Despite the improved conditions, optimism among executives remained low. This could be on account of the high taxes implemented recently as well as further proposals for tax hikes in the Finance Bill, 2024.

In May, the survey shows that business expectations for the year ahead dipped after rising to a 13-month high in April.

It showed that although firms had an overall positive view regarding future business activity, with 19 per cent of respondents expecting growth, the level of optimism was well below the long-run average.

"Though firms are positive about expectations over the next 12 months, this optimism is still well below the long-term average," said Mr Legilisho.