Zambia's private sector growth hits seven-year high in September

Zambian business conditions improved at their fastest pace since May 2018, with the Stanbic Bank Zambia PMI rising to 52.2 in September, driven by robust output, new orders, and increased employment. While favorable exchange rates boosted demand, firms faced rising input and wage costs, leading to increased selling prices. Notably, despite the current strong performance, business confidence regarding future output unexpectedly declined to an eight-month low, falling below the historical average, which could signal underlying concerns.

Analysis

Zambia's private sector exhibited its most significant expansion since May 2018, with the headline Purchasing Managers’ Index (PMI) rising to 52.2 in September from 51.2 in August. This growth was underpinned by the strongest increase in output since June 2023, fueled by accelerated new orders and favorable exchange rate movements that bolstered customer purchasing power. However, this expansion was not uniform, as construction and wholesale & retail sectors reported a contraction in output. Concurrently, inflationary pressures are mounting; after two months of decline, input costs rose, and staff cost inflation hit its highest level since June 2024, prompting firms to raise selling prices at the fastest rate in five months. The most critical takeaway is the stark divergence between current performance and future expectations. Despite the robust present activity and a steep rise in employment, business confidence regarding future output plummeted to an eight-month low, falling below the historical average and signaling potential underlying concerns that could undermine the sustainability of the current growth trajectory.

Key Decisions for Investors

• Investors should treat the current strength in Zambian economic data with caution, as the significant drop in future business confidence to an eight-month low suggests the positive momentum may not be sustainable.
• Monitor Zambian inflation and central bank policy closely, as rising input costs and wages are being passed on to consumers, which could necessitate monetary tightening and impact asset valuations.
• Portfolio allocations should consider the uneven nature of the recovery; while the overall private sector is expanding, the reported contraction in the construction and wholesale & retail sectors presents a risk for investors with concentrated exposure in those areas.
• The favorable currency movements against the US dollar were a key driver of demand, making investments sensitive to the stability and direction of the Zambian Kwacha's exchange rate.