The private sector returned to growth in July after four months of stagnation and contraction, driven by stronger customer demand and rising new orders, although high costs and supply chain bottlenecks continued to weigh on production.
The latest Stanbic Bank Kenya Purchasing Managers' Index (PMI), which tracks activity in the private sector, rose to 51.3 in July from 50.0 in June, moving back above the 50-point threshold that separates expansion from contraction.
The reading signals a slight improvement in business conditions and marks the first expansion since February.
The recovery was largely supported by increase in new orders since January as businesses attracted more customers through referrals, marketing campaigns and new products and services. New business expanded for a second consecutive month after declining over the previous three months.
Despite the pickup in demand, firms continued to struggle to increase production.
Output contracted for the fifth straight month, although at the slowest pace during the current downturn, with businesses citing elevated inflation, higher input costs and tight cash flows that limited their ability to meet rising orders.
Businesses responded by stepping up hiring, with employment rising at its fastest pace this year as firms recruited mainly short-term workers to cope with growing workloads.
Outstanding work increased for a second month, reflecting the gap between incoming orders and production capacity, alongside delays in receiving imported inputs.
Input cost pressures remained elevated, easing only slightly from June's 31-month high. More than a third of surveyed firms reported higher operating expenses, driven by rising transport costs, higher fuel prices and shortages of materials linked to the conflict in the Middle East.
However, firms became more cautious about passing these costs on to customers, with selling price inflation slowing to its weakest pace since April.
Supplier performance also deteriorated for a second consecutive month as delivery times lengthened due to input shortages and rising costs.
Companies adopted mixed inventory strategies, with some increasing stock levels to guard against shortages while others cut inventories to preserve cash.
Looking ahead, business confidence strengthened significantly, reaching its highest level since February 2023. Firms expressed optimism that stronger demand, business diversification, innovation and supply chain improvements would support higher output in the months ahead.
Christopher Legilisho, economist at Stanbic Bank, said the July survey indicated demand was beginning to recover but warned that elevated costs and logistics challenges continued to constrain production.
He noted that firms were responding to stronger orders through modest hiring, while some absorbed higher costs, instead of raising prices, to protect demand in a price-sensitive market.
