Kenya’s Private Sector Hits Rough Patch as Rising Costs Squeeze Demand

Kenya’s private sector endured one of its most difficult months in nearly two years in May, as businesses grappled with weakening consumer demand, rising operational costs, and a decline in new orders, according to the latest Stanbic Bank Kenya Purchasing Managers’ Index (PMI).

The PMI fell sharply to 46.6 in May from 49.4 in April, marking the fastest deterioration in business conditions since July 2024 and extending the sector’s contraction deeper below the crucial 50-point threshold that separates growth from decline.

The latest survey paints a picture of an economy where businesses are increasingly facing a difficult balancing act. While costs continue to rise, consumers are becoming more cautious with their spending, forcing firms to contend with slower sales and tighter cash flows.

One of the most striking findings from the report was the sharp decline in new orders. Companies reported that inflationary pressures had weakened purchasing power, prompting households and businesses alike to tighten their budgets. As a result, new sales fell at the fastest pace since the middle of last year, highlighting growing caution across the market.

The slowdown was particularly evident in the construction and services sectors, both of which recorded declines in output and new business. Manufacturing emerged as the lone bright spot, with firms in the sector managing to expand production despite the challenging operating environment.

Business activity also weakened considerably during the month. Survey respondents pointed to reduced customer demand and lower work intakes as key factors behind the decline. According to Stanbic Bank Economist Christopher Legilisho, disruptions caused by nationwide protests by transportation sector players may have compounded the slowdown by limiting movement and interfering with normal business operations.

The impact of the downturn has now begun to filter through to employment. For the first time in 16 months, Kenyan businesses reduced their workforce numbers. The cuts were largely concentrated among temporary workers whose contracts were not renewed as firms sought to align staffing levels with reduced workloads.

At the same time, companies scaled back purchases of inputs, citing weak sales, cash flow concerns and mounting expenses. Input buying contracted for the first time in eight months, while efforts to build inventories slowed significantly.

Adding to the pressure was a sharp increase in operating costs. The report showed that overall input price inflation accelerated to its highest level since November 2023. Purchase costs rose markedly, driven largely by higher fuel and transportation expenses. Although wage costs continued to rise, the increase remained relatively modest compared to other cost categories.

Businesses responded by passing some of these higher costs on to customers. Selling prices rose at the fastest pace in two-and-a-half years, with all monitored sectors reporting increases in output charges. While necessary for protecting margins, these price hikes risk further dampening demand in an already fragile market.

Yet despite the current challenges, there remains a sense of cautious optimism among Kenyan businesses. Confidence regarding future activity improved in May, reaching its strongest level since February 2023. Firms cited increased advertising, product diversification initiatives, and growing investment in digital and online channels as key drivers of their positive outlook.

The latest PMI data suggests that while Kenya’s private sector is navigating a difficult period marked by cost pressures and subdued demand, many businesses are already positioning themselves for recovery. Whether that optimism translates into stronger economic activity in the months ahead will largely depend on the trajectories of inflation, consumer spending, and overall business confidence.

For now, however, the message from the PMI is clear: Kenyan businesses are feeling the strain, and the road to recovery may still have a few bumps ahead.

Read Also: Kenya PMI Slips To 50.4 in February As Private Sector Growth Nearly Stalls