Private sector cut spending in March amid rising cost of inputs

Private sector firms were forced to reduce purchasing of goods in March in what Stanbic Bank Kenya attributes to higher cost of inputs.

According to Stanbic Bank, Purchasing Managers’ Index dropped from 52.9 in February to 50.5 in March, signalling a slower and only marginal improvement in the health of the Kenyan private sector economy.

The lender says price gauges for both business costs and charges reached their highest levels since early-2014, as purchase prices were reportedly exacerbated by the war in Ukraine and government taxes.

“Economic activity continued to expand in March but at a slower pace than in February. The slowdown was driven by rising inflation which resulted in subdued demand growth by consumers and a contraction in output by producers. Input prices rose at the fastest rate in 8 years driven by higher taxes and the Russia-Ukraine conflict which has increased fuel, food, and fertilizer raw material costs,” said Kuria Kamau, Stanbic Bank Fixed Income and Currency Strategist.

Inflation rose to 5.56% in March from 5.08% in February attributed to increases in fuel and food.

With increases in essential items, firms were forced to increase selling prices.

However, this limited both client spending and business activity, with the latter seeing a renewed fall at the end of the first quarter.

The overall decline in output was modest, driven by contractions in agriculture, construction and wholesale & retail sectors.

Nonetheless, input purchasing continued to increase sharply as firms looked to stockpile goods amid worries that supply could worsen. A further improvement in vendor performance helped inventories to rise at the fastest pace since November 2020, Stanbic said.

“Firms increased the stock of purchases in anticipation of further increases in input prices and ramped up employment levels to support the slightly higher demand witnessed. Output prices, meanwhile, rose at the second-fastest rate on record as firms tried to protect their margins. While most businesses remain positive about output growing over the next year, the concerns around rising inflation pushed the future output index to its lowest level since the start of the survey,” added Kamau.

Companies however see growth going forward with increased supply of new products and marketing.

Despite input price increases, the private sector registered a slight increase in employment numbers in March as firms sought to boost capacity and complete new sales.

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