Purchasing managers index and Kenya’s inflation

Economists keep tabs on the health of the economy by, among other tools, measuring business activity.

On such measure is the purchasing managers index (PMI). In Kenya, CFC Stanbic Bank compiles the PMI by conducting a monthly survey of 400 companies in agriculture, mining, manufacturing, services, construction and retail sectors.

To compile the index, purchasing managers are asked the volume and direction of various indicators of activity in their companies such as new orders, output and stocks.

These in turn carry various weights in the overall index. New orders carry a weight of 30 percent in the index. Output carries 25 percent, Employment (20 percent), Suppliers’ Delivery Times (15 percent) and Stock of Items Purchased (10 percent).

The Delivery Times index inverted so that it moves in a comparable direction. A reading above 50 indicates an expansion of activity compared to the previous month; below 50 represents a contraction; while 50 indicates no change.

The UDA administration, well aware that the republic needs good news for a change, and keen to convince us that the economy has turned the corner for better, will no doubt have been disappointed by the title of the July PMI report - Kenya Private Sector Shrinks the Most in Almost a Year.

The purchasing managers’ index fell to 45.5 in July from 47.8 in June, indicating a worsening in operating conditions over the course of July. The pace of deterioration is the fastest in almost a year.

This is the sixth consecutive month of deterioration in the country's private sector activity. Output contracted sharply, the second-worst such contraction since 2017, resulting in cash flow problems for some companies.

The number of new businesses dramatically fell, primarily as a result of a decline in client demand. Inflationary pressures remained severe in July, while companies reported a sharp rise in input costs, higher fuel prices, and increased tax burdens.

Looking to the future, businesses remained very pessimistic as only 14% of the surveyed firms forecasts growth over the next 12 months.

The deterioration in the exchange rate, rising fuel prices and taxes culminated in substantial rise in business costs in July, with the rate of input price inflation among the quickest since the survey began in 2014.

Of the five sectors tracked, only agriculture recorded sales growth. With sales falling, businesses indicated a sharp drop in output over the course of July.

This may well sound confusing, given that the Kenya National Bureau of Statistics (KNBS) reports a slight improvement in the July consumer price index (CPI) to 7.3 per cent, down from 7.9 per cent the previous month.

Harvests from the long rains have been in the market for two months now. Prices of most food products dropped in July when compared to June.

In particular, the prices of potatoes, tomatoes, cowpeas and cabbages declined by between eight and twelve per cent. However, the price of onions (leeks and bulbs) increased by 11.4 per cent.

There was a slight easing of the prices of housing, water, electricity, gas and other fuels. Overall, these prices decreased by 1.2 per cent in July.

This was mainly due to decrease in the prices of gas/LPG and electricity. Between June and July the prices of 13Kg gas/LPG, electricity 200 kilowatts and electricity 50 kilowatts decreased by 9.2, 5.3 and 4.4 per cent, respectively, while the price of kerosene rose by 5 per cent.

The transport costs went up by 3.5 per cent in July due to increases in prices of petrol and diesel, which rose by 6.9 per cent and 7.4 per cent, respectively. Fares for some public transport routes, for example, from Githurai to the central business district (town) went up by 17 percent.

Before you tweet or in-box me your receipt showing how little a thousand shillings is buying you in electricity tokens, remember so far, we are talking about the changes between June and July this year. A period of just 30 days. So how do the numbers look like when you take a 12-month view?

The prices of fresh packeted cow milk, Irish potatoes, cow peas, carrots, oranges and peas are up between 5 and 14 per cent from their level of one year ago.

The price of onions is up 22 percent. The prices of beans are up a whooping 33 percent, causing grief to many secondary school principals. But tomato farmers are doing worse this year, the prices down 9.8 percent this July compared to last year.

The Githurai to town matatu fares are up 40 per cent compared to 12 months ago. Diesel pump prices are up 28 percent, while petrol and kerosene (paraffin) are up 22.1 and 32.1 percent respectively.

Electricity (200 kilowatts) is up 46.6 percent, while prices for small consumers (50 kilowatts) are up 65.7 percent. This is why your thousand shillings is buying less tokens this year compared to last. Helpfully, the price of LPG is down 10.1 percent.

What is the prognosis for this third quarter? Economists fear the worst is yet to come. With the long rains over, so is the reprieve in food prices.

With the Court of Appeal having lifted the suspension, the finance act 2023 is now under full implementation, complete with notices by KRA in the newspapers requiring employers to remit the housing levy promptly, and to remember to include the July portion.

As the purchasing managers’ point out, the effects of the increased taxation will work their way into most supply chains this quarter, increasing input costs. In turn, companies will seek to increase selling prices to cover those costs. The slight improvement in the CPI may be short lived.

@NdirituMuriithi is an economist