Private sector gains in May, but the worst yet to come, new index shows

Private sector performance inched up in May after falling sharply a month earlier, a new survey showed.

However, the closely watched monthly business performance indicator survey by Stanbic Bank and UK’s Markit showed that conditions look set to worsen in coming months.

The Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) came in at 36.7, higher than April’s 34.8 but still well below the 50 mark that separates expansion from contraction.

According to the survey, the marginal improvement was driven by the first drop in operating costs in five years, suggesting that businesses failed to grow, but prevented further worsening of their margins.

“Business conditions have contracted for five consecutive months now. In fact, the employment sub-index fell by the sharpest level in May since data collection began. Consequently, the reduction in the workforce has reduced overall input prices for private sector firms,” Jibran Qureishi, Stanbic Bank’s regional economist for global markets, said in the PMI statement.

“Furthermore, due to weak domestic demand conditions, firms have looked to reduce overall output prices too.”

Companies bet that lower product prices would help grow sales. The impact of social distancing and closure of businesses like bars and restaurants has impacted on consumer spending, setting the stage for job cuts and unpaid leave for workers.

The survey said many companies and cut jobs in May, while exports fell due to travel curbs and lockdowns in overseas markets. By yesterday, Kenya had reported 2,340 positive coronavirus cases and 78 deaths.

The State has imposed a daily dawn-to-dusk curfew, banned public gatherings and asked people not to leave home unless absolutely necessary, as well as halting movement into and out of five counties, including Nairobi and Mombasa. “We still expect the epicentre of Covid-19 to be felt in Q2, with respect to economic activity,” said Mr Qureishi

“Firms linked this to lower demand and a worsening outlook, with the 12-month forecast for activity dropping to the weakest since August 2016.”

The government has cut its economic growth forecast for 2020 to 3 percent from 6 percent, or 2.5 percent if the crisis worsens. The PMI findings show other key indicators such as output, new orders and exports continuing to drop in the month, marking the longest contraction streak in Kenya’s private sector since UK’s Markit Economics started polling senior corporate managers in key sectors such as manufacturing and agriculture in February 2014.

Last week, the Central Bank of Kenya (CBK) said that small and medium-sized businesses needed urgent help to survive, with many at risk of closing by the end of this month.

Citing a study conducted in April, CBK said the small businesses surveyed had said that without help they would close by the end of June because they lacked credit buffers and other resources to survive the slowdown caused by the coronavirus disease. Should small firms be financially distressed, this will deepen job losses given that they account for the bulk of jobs in the country and have in recent years emerged as the biggest drivers of new hiring.