Kenya private sector activity contracts for first time in seven months, PMI shows

Kenya's private sector activity contracted in May for the first time in seven months, with the Stanbic Bank Kenya Purchasing Managers’ Index falling to 49.6 from 52.0, driven by slowing performance in construction, wholesale and retail, and services sectors. Business expectations for the next 12 months are subdued, falling to their second-lowest level on record, with only 4% of firms expecting improved performance amid consumer hesitancy and economic concerns, despite inflation falling to 3.8% year-on-year.

Analysis

Kenya's private sector activity contracted in May for the first time in seven months, with the Stanbic Bank Kenya Purchasing Managers’ Index (PMI) declining to 49.6 from 52.0 in April, signaling a slight overall downturn. This contraction represents the fastest decline in total business output in 10 months and was primarily driven by slowing performance in the construction, wholesale & retail, and services sectors, contrasting with output increases in agriculture and manufacturing. Business expectations for the next 12 months have plummeted to their second-lowest level on record, with only 4% of surveyed firms anticipating improved performance. This subdued outlook is attributed to consumer hesitancy driven by concerns about their economic state and a generally dim outlook, according to Stanbic Bank. Despite these challenging conditions, Kenya's year-on-year inflation rate eased to 3.8% in May from 4.1% in April. The economy expanded by 4.7% in the previous year, and the finance ministry projects a 5.3% growth for 2025, a forecast that now faces increased scrutiny given the current private sector weakness and strongly negative business sentiment.

Key Decisions for Investors

• Investors should adopt a cautious stance towards Kenyan assets, particularly those with high exposure to the domestic construction, wholesale & retail, and services sectors, given the PMI contraction and severely weakened business confidence.
• Monitor upcoming PMI releases and consumer sentiment data closely for indications of whether this downturn is a temporary blip or the beginning of a more sustained period of economic weakness.
• Critically evaluate the government's 5.3% growth forecast for 2025 against the backdrop of current negative private sector data and sentiment, and be prepared for potential downward revisions if conditions do not improve.
• While falling inflation is a positive macroeconomic factor, its immediate impact on stimulating real economic activity may be limited in the current environment of deep consumer pessimism and poor business outlook.