Companies cut jobs for the second month running in June on the back of runaway inflation which squeezed stagnant salaries, hurting demand for goods and services.
Findings of Stanbic Bank Kenya’s Purchasing Managers Index (PMI), based on feedback from about 400 corporate managers, suggested sales dropped at a quicker rate last month than a month earlier, setting the stage for further layoffs.
The closely-watched survey suggested output prices jumped at “unprecedented rates” in PMI’s history dating to January 2014. This was after firms continued to pass rising business costs largely due to soaring fuel prices, costly raw materials due to persistent supply shortages, strengthening US dollar and taxes onto consumers.
“With demand falling, companies reported slight reductions in their employment and purchases,” analysts at Stanbic Bank and American analytics firm, S&P Global, wrote in the PMI report for June.
“Firms commented that rising price pressures had weighed on client demand, while weaker cash flow and the upcoming elections were also noted as contributing factors.”
Inflation — a measure of annual changes in the cost of living— climbed to 7.9 percent in June, the highest level since August 2017. It was also the first time it also punched above the government’s upper limit target of 7.5 percent in that intervening period.
The jump in the cost of basic commodities has thinned the shopping basket of households, forcing them to cut on non-essential expenditures amid negative growth in real wages.
The report suggests that manufacturing, construction and retail sector firms suffered the biggest drop in sales as the rising cost of living took toll on budgets, cutting demand and prompting firms to reduce output.
“Domestic demand dropped at an accelerated pace with the fastest declines being recorded in manufacturing, construction and trade,” Stanbic Bank regional economist Kuria Kamau wrote in the PMI report.
“The lower domestic demand along with the increase in input prices, lower cash flows and the upcoming elections forced firms to scale back on output sharply.”
Firms in services sector such as banking, however, posted a “marginal rise in new business”.
The overall PMI reading — a gauge for month-on-month private sector actors such as output, new orders and employment — fell for the third month in a row to 46.8 from 48.2 in the prior month.
Reading below 50 signals a drop in business deals, with levels above denoting growth.
This means private sector activity has fallen in four of the first six months of the year under the weight of a sustained drop in consumer demand and firms’ output, with February and March being the exception.
Manufacturers have cited crude palm oil, wheat, steel and paper for posting the sharpest growth in prices amongst raw materials used by domestic factories largely due to global supply bottlenecks, exacerbated by Russia’s brutal war on Ukraine.
Job Wanjohi, head of policy and research at Kenya Association of Manufacturers, said most of the firms in the sector — a major driver of jobs — have a negative outlook on performance in coming months because of cost of raw materials and uncertainties associated with the electioneering period.
“Manufacturers are weary of the skyrocketing cost of production and other business operating costs, and delayed payments from the government,” Mr Wanjohi told the Business Daily via email.
