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The private sector ended 2022 on a high as new business rose at the sharpest rate since February helped by a softening of inflationary pressures, leading to accelerated increases in output and employment, a new survey shows.

Stanbic Bank Kenya PMI business activity index increased to a three-month high of 51.6 in December from 50.9 in November, as output expanded for the second month running, amid higher demand, favourable weather conditions and softer prices pressures.

A reading above 50 on the index shows expansion and below it indicates contraction. Employment increased to the fastest since March, with the backlogs of work decreasing for the second month in a row while new orders also continued to rise, boosted by a rise in domestic demand, according to the latest PMI data.

It says firms saw costs increase to the smallest extent in a year during the period under review—with as many firms accelerating staff hiring for the second month on the bounce in and the fastest seen since March. Signs that the pace of growth may be steadying—with inflation data last month coming in lower than forecast have contributed to a recovery in the private sector activities, according to the survey panelists.

“December PMI paints a positive picture for the economy, in line with the series average. It comes as no surprise to see activity expand, perhaps due to favourable weather conditions and softer price pressures before a challenging 2023,” said Mulalo Madula, an economist at Standard Bank Group. While that growth was seen in sectors like agriculture, manufacturing, wholesale, and retail sectors, the PMI reading indicates that activities fell in the services and construction sectors.

Despite further reports of currency weakness and higher value added tax (VAT), some firms noted that improving supply conditions, lower wage costs, and stabilising energy prices helped to soften inflation. Subsequently, companies raised their output prices to the smallest extent since August.

 Purchasing power

Kenya’s inflation rate slowed for the second consecutive month to 9.1 per cent in December 2022 compared to 9.5 per cent in November, the lowest since August when the figure stood at 8.5 percent.

Inflation is the gradual rise in prices throughout an economy. When inflation rises, the value of the shilling is worth less than they were in the past. As a result, people have less purchasing power and need to increase their incomes to maintain the standard of living they are used to.

Moderate inflation is, however, likely to be one of the few positive factors in the second half of 2023, according to Madula, since a series of new tax increases in the 2022 Finance Act, are expected to hit Kenyan businesses and consumers.

“Idiosyncratic factors, including taxes, are likely to dislocate inflation in the first half of the year,” he noted.

Those taxes include the 20 per cent Excise Tax on transactions between mobile wallets and banks, and the 16 per cent Value Added Tax (VAT), whose arrival has seen multinational tech companies commence applying a standard VAT rate on electronically supplied services such as streaming movies on Netflix or listening to music on Spotify, as the government looks to tap into the growing digital market in the country.