Business

Business conditions worsen in February as cost of living bites

Tuesday, March 7th, 2023 05:00 | By
Shoppers at a supermarket. PD/file

Business conditions deteriorated in February as cost of living pressures hit sales although most business executives remain optimistic about the future, a new survey shows.

The Stanbic Bank Kenya Purchasing Managers’ Index (PMI) mirrors Kenya National Bureau of Statistics' February data, which showed inflation had risen to 9.2 per cent on the back of the high cost of food, fuel and housing.

It shows the prevailing direction of economic trends in the manufacturing and service sectors which indicates that in February, output and new orders recorded sharp falls, leading to renewed cuts in employment and purchases.

The headline PMI dropped to 46.6 from an 11-month high of 52.0 in January. Readings above 50 signal an improvement in business conditions on the previous month, while those below show a deterioration.

Standard Bank Economist Mulalo Madula said although things were tough in February, business confidence going forward remained high and was at its highest level in nearly three years.

Tax burden

She said a weak shilling and increased tax burdens resulted in a sharper rise in input costs, described as one of the fastest since the series began in 2014.

Madula noted that while some firms passed the costs to consumers, the rate of charge inflation was broadly unchanged from January and much softer than that of input prices.

“After a stellar performance between September 2022 and January 2023, Kenya PMI fell into contraction territory in February as cash flow issues and cost of living weighed on demand,” she said in a statement. With currency depreciation inducing higher import cost and reports of tax burden, Madula stated that the increase in input costs and consequently output charges remain among the highest since the series began in 2014.

Findings from the survey indicate that demand weaknesses led to a sharp decline in new order volumes following a solid upturn in January. Firms also suffered from a marked fall in export sales, one of the fastest seen on record, the survey noted.

“The downturn in sales led Kenyan companies to make renewed cuts to activity, employment and purchasing in February. Output fell sharply and for the first time in four months, while input purchases fell for the first time since last August,” it added.

“While job losses were only mild overall, they were the strongest seen since 2021.”

Madula said while the sales decline was broad-based, agriculture was the only sector where sales increased.

The economist said the decrease in activity was uneven across firms in various sectors, with 38 per cent of respondents reporting a drop in activity compared with a quarter of respondents who reported an increase. “But then, despite everything, businesses are still optimistic about the outlook for the next 12 months, with the future output index rising for the second month in a row,” said Madula.

Supply chain

According to the survey, supply chain performance was broadly stable in February, ending a prior five-month run of improvement, with some firms reporting shortages in timber and foodstuffs as well as delays at the port, disruptions that led to a fall in stocks of purchases.

It also indicates that cost pressures accelerated to a notable pace in February, driven by purchase price inflation amid increased taxes and higher import costs as the exchange rate against the US dollar worsened.

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