Businesses last month raised prices of goods and services at second-highest pace in three years to protect their profit margins as rising fuel, transport and purchase costs eat into earnings, threatening to undermine a private-sector recovery driven by improving customer demand
The latest Stanbic Bank Kenya Purchasing Managers’ Index (PMI) shows that while companies are receiving more orders, mounting cash-flow difficulties and inflationary pressures are limiting their ability to expand production, clear backlogs and hire more workers.
‘Kenyan businesses subsequently raised their selling prices at a quicker pace, aiming to protect margins and pass on higher purchase costs,’ says the PMI report, which is based on responses from about 400 corporate managers across key sectors of the economy.
The findings point to an uneven recovery in which businesses are selling more but struggling to convert stronger demand into higher output and employment, with consumers shouldering part of the rising costs through more expensive goods and services.
The PMI, which tracks activity in the private sector, rose to 52.5 in October from 51.3 in September, its highest reading this year.
A reading above 50 signals an expansion in business activity compared with the previous month. New orders grew at their fastest pace in almost a year, signaling an improvement in demand across agriculture, manufacturing, construction, wholesale, retail, services and mining.
However, the expansion in output remained modest as businesses struggled with cash shortages and rising costs.
‘Cash flow issues and inflation concerns continued to hamper firms, and meant that the overall expansion in output was only modest,’ analysts at Stanbic Bank and S and P Global said in the report.
Input-cost inflation accelerated to its fastest pace since November 2023, while selling-price inflation recorded its second-fastest increase in three years, surpassed only by June this year.
Stanbic Bank economist Christopher Legilisho said companies were increasingly passing higher expenses to customers to shield their margins from rising operating costs.
‘Selling price inflation was the second-fastest in three years as firms sought to protect margins,’ he said.
The survey found that 36 percent of businesses experienced an increase in total input costs in October, compared with two percent that reported a decline.
Higher purchase prices, fuel and transport expenses were among the main drivers, with some suppliers also increasing charges in response to shortages and wider inflationary pressures. The price increases threaten to erode household purchasing power at a time when consumers are already grappling with higher living costs, pointing to limited room to absorb additional increases.
Kenya’s annual inflation accelerated to 7.32 percent in October from 6.76 percent in September, latest official figures show, largely reflecting higher food and transport costs.
The increase came amid rising fuel prices and pressure on food production from the ripple effects of the Middle East conflict and lower-than-expected rainfall. Higher transport costs also threaten to feed into the prices of food, essential goods and services.
The Energy and Petroleum Regulatory Authority raised the maximum pump prices of petrol and diesel for the October 15 to November 14 pricing cycle, adding to the burden on transporters and businesses.
The PMI reveals a growing mismatch between demand and the ability of companies to finance and fulfil orders.
Outstanding work increased for the fifth consecutive month in October, reaching its fastest pace in exactly seven years. Businesses attributed the growing backlogs to stronger demand, funding gaps and processing delays.
This suggests that improved sales are stretching operating capacity without necessarily generating the cash required to replenish stocks, pay suppliers and sustain higher production.
‘Backlogs accumulated at the fastest pace in seven years, while employment growth slowed to the weakest rate in the current five-month expansion,’ Mr Legilisho said.
‘This implies that stronger demand is stretching operating capacity.’
The slowdown in recruitment points to continued caution among employers, who are reluctant to commit to additional workers as higher expenses and cash-flow constraints limit their capacity to expand.
The combination of rising prices, mounting backlogs and weaker hiring momentum threatens to weaken the recovery if businesses cannot secure sufficient working capital to meet growing demand.
‘October’s survey therefore points to firmer demand and improved confidence, but the recovery remains constrained by price pressures, cash-flow difficulties and a modest hiring response,’ Mr Legilisho said.
Nevertheless, business confidence about the coming year improved, suggesting that companies were optimistic about the demand outlook despite the immediate cost pressures.
The share of firms expecting activity to increase over the next 12 months rose to 51 percent in October from 31 percent in September, pushing the future-output index to its highest level since March 2020.
Businesses cited expectations of stronger customer demand, marketing campaigns to attract buyers, and plans to expand their products and services.