Kenyan Business Optimism High as PMI Rises to 52.5 Despite Cost Pressures

Kenya's private sector grew for a second straight month in October, with output rising for the first time in eight months as stronger customer demand lifted new orders, a survey showed.

The Stanbic Bank Kenya Purchasing Managers' Index rose to 52.5 in October from 51.3 in September, its strongest reading so far this year.

A reading above 50.0 signals better business conditions than the previous month, while one below 50.0 points to a worsening.

New orders grew at their fastest pace in almost a year, with firms citing customer referrals, greater footfall and new contracts.

Sales volumes have now risen for five straight months, putting pressure on operating capacity.

Business activity rose for the first time since February, although the expansion was modest as cash flow problems and inflation worries held firms back.

Manufacturing recorded the quickest increases in output and new orders among the five sectors monitored.

"Kenya's Stanbic PMI improved markedly in October due to stronger output and sustained new orders activity, implying that demand conditions for the private sector aided the improvement. Improvements were broad-based across most sectors, with construction sector the only laggard," said Christopher Legilisho, economist at Stanbic Bank.

Business confidence strengthened sharply. About 51% of firms expect higher activity in a year's time, up from 31% in September, and sentiment was the strongest since March 2020.

Firms linked their optimism to planned expansions, new products and services, marketing campaigns and investments.

"Business confidence among firms improved notably; the future output index surged to its highest in six years. Further, businesses reported increases in employment," Legilisho said.

Stronger sales pushed companies to raise input purchases at the fastest pace since January, and stocks of purchases rose at their sharpest rate in exactly four years.

Suppliers delivered faster than at any time since September 2021, with vendors reportedly more responsive amid stiff competition.

The extra workload meant backlogs built up at the quickest rate in exactly seven years. Employment rose for a fifth month, but job creation was modest and the slowest in that run.

"Backlogs accumulated at the fastest pace in seven years, while employment growth slowed to the weakest rate in the current five-month expansion, which implies that stronger demand is stretching operating capacity," Legilisho said.

Costs were the main concern. About 36% of firms reported higher input costs in October, against 2% that saw a fall, and input price inflation was the fastest since November 2023, edging above June's recent high. Panellists frequently cited higher fuel and transport costs.

Firms passed some of the burden on to customers to protect margins. Output price inflation was the second-fastest in three years, exceeded only by June's.

"Rising costs remain a key constraint for the recovery. Input cost inflation reached its highest level since November 2023 due to fuel and transport costs, while selling price inflation was the second-fastest in three years as firms sought to protect margins," Legilisho said.

"October's survey therefore points to firmer demand and improved confidence, but the recovery remains constrained by price pressures, cash-flow difficulties and a modest hiring response," he added.