Firms feel heat of cost of living crisis as Kenyans cut spending

Companies and businesses around the country are feeling the pinch, grappling with a significant slowdown in activity as rising prices hit the pockets of ordinary Kenyans, making them less willing and able to spend.

This downturn, revealed in a key economic survey, deals a fresh blow to job creation, as companies struggle to sustain their workforce without robust sales.

The latest Stanbic Purchasing Managers' Index (PMI) – a crucial barometer of the health of Kenya's private sector – dipped below the critical 50-point mark in May, signalling a contraction for the first time in eight months.

The PMI is a national report card for businesses; a reading above 50 means the economy is growing, while a score below 50 indicates a slowdown.

Kenya's PMI fell to 49.6 in May from 52.0 in April, showing a slight but worrying decline after seven months of steady improvement.

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This fragility in the private sector's recovery has direct and severe consequences for the average Kenyan.

When businesses experience a decline in orders and output, they face a stark reality: they cannot afford to maintain their current staffing levels, let alone hire new employees.

This directly undermines efforts to create jobs, particularly for the nation's burgeoning youth population.

"The Stanbic Kenya PMI signalled fragility in the private sector's recovery," explained Christopher Legilisho, an economist at Standard Bank.

"There was a moderate contraction in output and a decline in new orders after seven months of expansion. Purchasing activity was also down, reflecting a lack of new projects."

The output – the total goods and services produced by businesses – saw its fastest contraction in ten months.

Factories are slowing down their production lines, and service providers are seeing fewer clients.

While this downturn was initially mild, it highlights a worrying trend. Industries like construction, wholesale and retail, and services were hit hardest, though agriculture and manufacturing surprisingly saw some growth.

A key factor behind this slowdown is a drop in new orders.

This means fewer customers are buying goods or requesting services. For many Kenyans, this is a direct result of rising prices – the cost of everyday necessities, food, and fuel has gone up, leaving less disposable income for other purchases.

Many Kenyans are currently grappling with a severe economic crisis that directly impacts their purchasing power, forcing them to make tough choices about what they can afford.

Despite these challenges, some businesses still managed to attract new clients, often through increased marketing efforts. This suggests that competition is fierce, and consumers are becoming more selective with their spending.

Businesses also faced higher input prices – the cost of raw materials, supplies, and operational expenses. These costs increased at their fastest pace in four months, partly due to rising purchase prices and higher tax payments.

However, even with these increased costs, companies largely tried to absorb the burden rather than pass it fully onto consumers.

This is evident in the fact that selling charges – the prices customers pay – rose at their weakest rate since last October, indicating firms are trying to keep prices competitive to retain customers, even if it squeezes their profit margins.

While some businesses increased their stocks of purchases (inventory) and slightly grew their staffing numbers (hiring short-term labour), the overall picture is one of caution. Businesses are not feeling confident about the future.

This subdued outlook is reflected in business expectations for the next 12 months, which remained near their lowest level.