Firms in manufacturing and trade cut workforce in May on the back of an inflation-induced drop in demand for goods and services which led the private sector to shed jobs to protect margins, a closely-watched survey suggested Monday.
Stanbic Bank Kenya’s Purchasing Managers Index (PMI) found a renewed fall in job opportunities in an environment of elevated inflationary pressure which hurt new orders, prompting firms to reduce output at levels last seen 13 months ago.
The PMI findings, based on feedback from about 400 corporate managers, showed that growth in jobs in the agriculture, construction and services sectors was not enough to reverse the fall in factories and retail stores.
“Due to higher input prices, firms were forced to scale back on output and employment levels,” Bank regional economist Kuria Kamau wrote in the PMI report for May.
“The higher input prices coupled with lower output by firms resulted in a further increase in output[selling] prices …[which], in turn, led to a reduction in domestic demand as clients cut back on spending due to the rising cost of living.”
The overall PMI reading — a gauge for month-on-month private sector activity such as output, new orders and employment — fell for the second month in a row to 48.2 from 49.5 in April.
This means private sector activity has fallen in three of the first five months of the year under the weight of a sustained drop in consumer demand and firms’ output, with February and March being the exception.
Companies reported the jump in the cost of inputs such as fuel and a range of other items in short supply such as wheat due to Russia’s brutal war on Ukraine amidst the strengthening US dollar pushing inflation for materials to an eight-year high.
This has seen firms raise selling prices since the beginning of the year, with wholesale and retail businesses raising their prices at the sharpest pace last month.
Kenya’s overall year-on-year inflation climbed to a 27-month high of 7.1 percent in May on the back of a jump in prices of essential items like cooking oil, food items, fuel and soap, according to the Kenya National Bureau of Statistics.
The Central Bank of Kenya has already warned of a “clear and present danger” of inflation punching above the upper inflation target of 7.5 per cent in coming months — which would be the first breach since August 2017 when it climbed to 8.04 per cent.
CBK’s inflation-targeting Monetary Policy Committee (MPC) Monday last week raised the benchmark central bank rate (CBR) — a signal for direction in interest rates — to 7.5 per cent from 7.0 per cent where it had been stuck since April 2020.
“Economic activity in Kenya contracted for the second consecutive month in May due to inflationary pressures that resulted in a drop in customer demand and a reduction in firms' output,” Mr Kamau said.
“Input price inflation remained at an eight-year high driven by rising fuel prices, higher taxes, and input shortages.”
