Construction keeps economy afloat as manufacturing dips

Strong growth in the construction, trade and transport sectors helped save the Kenyan economy from slowing down in the second quarter of the year, newly released official data shows. 

The Kenya National Bureau of Statistics (KNBS) said the economy grew by 4.9 per cent in the first quarter of the year, slightly higher than the 4.7 per cent recorded in the same quarter last year.

The data shows that poor performance in the manufacturing and tourism sectors continued to drag growth. The manufacturing sector activity slowed down to 3.5 per cent compared to 6.4 per cent in a similar period last year.

The construction sector, which mainly consists of infrastructure projects such as roads, rail and real estate, grew at the highest rate of 11.3 per cent mainly helped by the ongoing construction of the standard gauge railway that started a few months ago.

“The growth was mainly supported by strong expansion of construction, finance and insurance, information and communication, electricity and water supply, wholesale and retail trade, as well as transport and storage,” said KNBS director-general Zachary Mwangi.

The 4.9 per cent growth was below analysts’ expectation that the economy would expand by at least five per cent in the first quarter of the year.

“I expected the economy to grow by no less than five per cent. Looking at the headline number of 4.9 per cent, it seems things aren’t going according to expectations,” said Johannesburg-based Sub-Saharan economist for investment bank Renaissance Capital Yvonne Mhango.

The Treasury has said that it expects the economy to grow at between 6.5 per cent and 7 per cent this year but hopes of attaining the target now look to be slipping away.

READ: Treasury sees 6.9pc growth as pay demand threatens gains

The many challenges facing the Kenyan economy have already forced the International Monetary Fund (IMF) to revise its full-year growth projection from 6.9 per cent to 6.5 per cent.

The 4.9 per cent growth rate was slowest in the past four quarters.

Decline in manufacturing

The KNBS figures show that a steep decline in the processing of tobacco and maize slowed down activity in the manufacturing sector.

“The decelerated growth was attributed to decline in manufacture of tobacco, processing of canned fruits, maize meal and sugar. On the other hand, growth in the sector was supported by assembly of motor vehicles, production of beer, manufacture of galvanised sheet, production of soft drinks and cement,” the KNBS said in the report.

Industrialisation secretary Adan Mohamed said during the launch of a steel plant in Ruiru recently that local manufacturers were experiencing delays in obtaining work permits and getting VAT refunds —revealing the extent to which red tape is affecting productivity in the key sector.

Exports, which are mainly a factor of manufacturing and agriculture, also declined, widening the trade deficit by 6.4 per cent to Sh224.1 billion.

A country’s net exports are one of the four broad components of gross domestic product (GDP). The others are investment, consumption and government spending.

“During the first quarter of 2015, merchandise trade deficit worsened by 6.4 per cent to Sh224.1 billion from Sh210.6 billion recorded in the first quarter of 2014. Imports increased by 3.0 per cent to Sh355.7 billion whereas the value of exports shrunk by 2.3 per cent to Sh131.5 billion,” the KNBS said in the quarterly report.

Tourism

Tourism declined for the fifth consecutive quarter on the poor performance of hotels and restaurants as well as accommodation, showing the extent to which rampant insecurity has wreaked havoc in the sector.

“All the sectors of the economy recorded positive growth of varying magnitudes except the hotels and restaurant whose growth contracted,” said the KNBS.

Bed occupancy rate in the coastal beach hotels shrunk by 21.9 per cent during the period, causing the sector to contract by 7.5 per cent compared to 14.1 per cent in the same quarter last year.

“The continuous underperformance of the sector is due to insecurity concerns especially in the coastal region and negative travel advisories issued by some European source markets,” said the KNBS.

"Wildly optimistic projections"

Aly-Khan Satchu, who heads the financial advisory and data vending firm Rich Management, said the 4.9 per cent GDP growth is an early indication that the forecast by both the Treasury and the Bretton Woods institutions may be “wildly optimistic.”

“It is a signal that the economy is not following the projected trajectory of seven per cent as indicated in the budget. It is a significant miss. I expected at least five per cent growth in the first quarter,” he said, citing the fact that growth stood at 5.5 per cent in the last quarter of 2014.

The 4.9 per cent growth in the first quarter of this year, Mr Satchu said, is “far below expectations”.

Mr Satchu said the increase in interest rates and the weakening shilling only served to show the economy’s declining fortunes relative to the past few quarters.

Last year GDP growth stood at 5.3 per cent with the second quarter of the year being the best performing at 6.0 per cent.

Since 2010, the best performing first quarters were in 2011 when the GDP grew by 7.6 per cent and 2010 when it grew by 7.3 per cent.